As a newly hired financial analyst, your first job at VersaLife Corporation is to calculate the company's cost of capital
The present capital structure, which is considered optimal, is as follows:
Market Value
Debt $80 million
Preferred Stock $10 million
Common Equity $110 million
Total Capital $200 million
If VersaLife Corporation issues new debt, then the bond market expects a yield of 7.5%. Preferred stock is trading for $96, has a $100 par value and pays an annual dividend of 8% (the next dividend is due in one year). Common equity has a beta of 1.20, the market risk premium is 5%, and the risk-free rate is 3%. If the firm's tax rate is 40%, what is the weighted average cost of capital? Round answers to the nearest tenth.
A) 7.2%
B) 7.5%
C) 8.2%
D) 8.5%
E) 9.0%
A
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