Reference no: EM132544464

You work for TFNZ Hydrotech, a large manufacturer of high-pressure industrial water pumps. The Company specializes in natural disaster services, ranging from pumps that draw water from lakes, ponds, and streams in drought-stricken areas to pump that remove high water volumes in the flooded area. You report directly to the Chief Operating Officer (CFO). The company has determined its optimal capital structure, which is composed of the following sources: (1) long-term debt with invested capital of RM3 million; preference stock with invested capital of 0.5 million; and the common stock equity of RM6.5 million. The firm can sell a 20-year, RM1,000 par value, 9 percent bond, paid semiannually for RM980. A flotation cost of 3 percent of the face value would be required in addition to the discount of RM20. The firm has determined it can issue preferred stock at RM65 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share. The firm's common stock is currently selling for RM40 per share. The dividend expected to be paid at the end of the coming year is RM5.07. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was RM3.45. It is expected that to sell, a new common stock issue must be underpriced at RM1 per share and the firm must pay RM1 per share in flotation costs. Additionally, the firm's marginal tax rate is 40 percent.

Based on the above information, compute the cost of capital of the company.