A company has used three types of debt, preferred stock, and common stock to finance the investments. The debt includes a $4 million bank loan that is secured by machinery and equipment. This loan has an interest rate of 6.0%, and the company could expect to pay the same rate if the loan were refinanced today. The company also has a second bank loan (a $3 million mortgage on the manufacturing plant) with an interest rate of 5.5%. Again, the rate would be the same today. The third type of debt is a bond issue that the firm sold two years ago for $11 million. The market value of these bonds today is $10 million. The effective annual yield on the bonds is 7.0%.
The preferred stock pays an annual dividend of 4.5% on a stated (par) value of $100. A share of this stock is currently selling for $60, and there are 100,000 shares outstanding. Additionally, there are 1 million shares of common stock outstanding, and they are currently selling for $21 each. It has been estimated that the beta of these shares is 0.95.
The risk-free 20-year Treasury bond rate is currently 4.7% and it has been estimated that the market risk premium is 6.5%. The company’s marginal tax rate is 35%. What is the weighted average cost of capital for this company?