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Consider a company with the following capital structure: The company’s 40,000 bonds are selling at 80%...

  1. Consider a company with the following capital structure: The company’s 40,000 bonds are selling at 80% of $10,000 face value per bond, while 80 million common shares are selling at $5.50 per share and 160,000 preferred shares are selling at $250 per share. The company’s bonds are priced to yield 6%. Using the single-factor model, the company’s equity beta is estimated to be 1.6. And the company’s preferred shares are committed to pay $20 annual dividend per share indefinitely. The T-bills return 3% annually and the annual expected return of the S&P 500 Index is 8%. The company is in 35% marginal tax bracket. Calculate the annual weighted average cost of capital of this company.
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