Reference no: EM132856800

Treetop Inc. has the following capital structure:

Debt: 10% coupon, due in 8 years $10,000,000

Preferreds: 7.5% dividend (100,000 shares) 2,500,000

Common shares: 600,000 outstanding 6,000,000

Retained earnings 4,500,000

• During the last five years Treetop has enjoyed steady growth, with common stock dividends growing from $0.80 to $1.23 (just recently paid). The common share price currently trades at $15.00. If new shares were issued at $15.00, they would require flotation expenses of 7 percent of proceeds.
• The preferred shares currently trade at $26.50, and any new issue would require flotation expenses of 5 percent of price to investors.
• The bonds currently pay interest semiannually and are trading at a price that yields a nominal 12 percent annual rate. Flotation costs of new debt would be 4 percent of proceeds.
• Treetop's tax rate is 38 percent, and equity financing would require a new share issue.

Required:

Problem 1: Calculate the weighted average cost of capital of Treetop Inc.