Mr. Glass, the vice-president of finance of 21st Century Windows, Inc., has given you the following information
and has asked you to compute the weighted average cost of capital to be used for the analysis of a prospective project. The company currently has outstanding 30,000 10-year bonds with a 5.5 percent coupon rate and another 55,000 7-year bonds with a 3.5 percent coupon rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 6.5 percent. The common stock has a price of $72 and an expected dividend of $3.50 per share. The firm’s historical payout ratio is 60 percent and its ROE is 15 percent. The preferred stock is selling at $68 per share and carries a dividend of $7.50 per share. The flotation cost is 3.2 percent of the selling price for preferred stock. The optimum capital structure is 25 percent debt, 30 percent preferred stock, and 45 percent common equity in the form of retained earnings. The corporate tax rate is 24 percent. What is the WACC of the firm ?
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