Reference no: EM132765375

Pacific Intermountain Utilities Company has a present capital structure (which the company feels is optimal) of 50 percent long-term debt,10 percent preferred stock, and 40 percent common equity. Forthcoming year, the company has determined that its optimal capital budget can be externally financed with $70 million of 10 percent first-mortgage bonds sold at par and $14 million of preferred stock costing the company 11 percent. The remainder of the capital budget will be financed with retained earnings. The company's common stock is presently selling at $25 a share, and next year's common dividend, D1, isexpected to be $2 a share. The company has 25 million common shares outstanding. Next year's net income available to common stock (including net income from next year's capital budget) is expected to be $106 million. The company's past annual growth rate in dividends and earnings has been 6 percent. However, a 5 percent annual growth in earnings and dividends is expected for the foreseeable future. The company's marginal tax rate is 40 percent.

Problem 1: Calculate the company's weighted cost of capital for the coming year.