Problem:

The firm has target capital structure of 60% common stock, 30% debt and 10% preferred stock. The firm wishes to issue new 30 years bond with 10% coupon rate. The flotation cost will be $20 and the bond has to be sold at 5% discount. To issue new preferred stock the company has to pay $2 as flotation cost. The market value of preferred stock is $8 and the stock will pay $1 dollar dividend. New common stock will cost the company $2. The expected dividend is $3 and the market value is $19. Tax rate is 40%.

Required:

Question: What is the company's weighted average cost of capital?

• 18.5%
• 16.7%
• 17.2%
• 17.85%
• 14.32%

Note: Please show how you came up with the solution.