Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rat percent. Northwest's treasurer is trying to determine the corporation's current weighted average cost of capital in order to profitability of capital budgeting projects. Historically, the corporation's earnings and dividends per share have increased about 6.2 percent annually and this should he future. Northwest's common stock is selling at $60 per share, and the company will pay a $4.50 per share dividend (D The company's $100 preferred stock has been yielding 8 percent in the current market. Flotation costs for the company ha estimated by its investment banker to be $2.00 for preferred stock. The company's optimum capital structure is 50 percent debt, 10 percent preferred stock, and 40 percent common equity in etained earnings. Refer to the following table on bond issues for comparative yields on bonds of equal risk to Northwest. Data on Bond Issues Issue Utilities: Southwest electric power-7 1/4 2023 Pacific bell-7 3/8 2025 Pennsylvania power & light-8 1/2 2022 Industrials: Johnson & Johnson-6 3/4 2023 Dillard's Department Stores-7 1/8 2023 Marriott Corp.-10 2015 Moody's Rating Aa2 Aa3 A2 Aaa A2 B2 Price $875.18 887.25 950.66 840.24 920.92 1,015.10 Yield to Maturity 8.24% 8.43 8.99 8.14% 8.44 9.99 a. Compute the cost of debt, Kd. (Use the accompanying table-relate to the utility bond credit rating for yield.) (Do not rou
Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rat percent. Northwest's treasurer is trying to determine the corporation's current weighted average cost of capital in order to profitability of capital budgeting projects. Historically, the corporation's earnings and dividends per share have increased about 6.2 percent annually and this should he future. Northwest's common stock is selling at $60 per share, and the company will pay a $4.50 per share dividend (D The company's $100 preferred stock has been yielding 8 percent in the current market. Flotation costs for the company ha estimated by its investment banker to be $2.00 for preferred stock. The company's optimum capital structure is 50 percent debt, 10 percent preferred stock, and 40 percent common equity in etained earnings. Refer to the following table on bond issues for comparative yields on bonds of equal risk to Northwest. Data on Bond Issues Issue Utilities: Southwest electric power-7 1/4 2023 Pacific bell-7 3/8 2025 Pennsylvania power & light-8 1/2 2022 Industrials: Johnson & Johnson-6 3/4 2023 Dillard's Department Stores-7 1/8 2023 Marriott Corp.-10 2015 Moody's Rating Aa2 Aa3 A2 Aaa A2 B2 Price $875.18 887.25 950.66 840.24 920.92 1,015.10 Yield to Maturity 8.24% 8.43 8.99 8.14% 8.44 9.99 a. Compute the cost of debt, Kd. (Use the accompanying table-relate to the utility bond credit rating for yield.) (Do not rou
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 35
percent. Northwest's treasurer is trying to determine the corporation's current weighted average cost of capital in order to assess the
profitability of capital budgeting projects.
Historically, the corporation's earnings and dividends per share have increased about 6.2 percent annually and this should continue in
the future. Northwest's common stock is selling at $60 per share, and the company will pay a $4.50 per share dividend (D₁).
The company's $100 preferred stock has been yielding 8 percent in the current market. Flotation costs for the company have been
estimated by its investment banker to be $2.00 for preferred stock.
The company's optimum capital structure is 50 percent debt, 10 percent preferred stock, and 40 percent common equity in the form of
retained earnings. Refer to the following table on bond issues for comparative yields on bonds of equal risk to Northwest.
Data on Bond Issues
Issue
Utilities:
Southwest electric power-7 1/4 2023
Pacific bell-7 3/8 2025
Pennsylvania power & light-8 1/2 2022
Industrials:
Johnson & Johnson-6 3/4 2023
Dillard's Department Stores-7 1/8 2023
Marriott Corp.-10 2015
Cost of debt
Moody's
Rating
%
Aa2
Aa3
A2
Aaa
A2
B2
$
Price
875.18
887.25
950.66
840.24
920.92
1,015.10
Yield to
Maturity
8.24%
8.43
8.99
a. Compute the cost of debt, Kd. (Use the accompanying table-relate to the utility bond credit rating for yield.) (Do not round
intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
8.14%
8.44
9.99
Transcribed Image Text:b. Compute the cost of preferred stock, Kp. (Do not round intermediate calculations. Input your answer as a percent rounded to 2
decimal places.)
Cost of preferred stock
c. Compute the cost of common equity in the form of retained earnings, Ke. (Do not round intermediate calculations. Input your
answer as a percent rounded to 2 decimal places.)
Cost of common equity
%
Debt
Preferred stock
Common equity
Weighted average cost of capital
%
d. Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate
calculations. Input your answers as a percent rounded to 2 decimal places.)
Weighted Cost
%
%
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