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Problem IV (18  points)

Use the following information to find the weighted average

cost of capital.

Perry Corporation can issue bonds at a market rate of interest of 10%. The tax rate for Perry is 40%. Preferred stock with annual dividends of $10 can be issued for $100. Common stock with dividends in year one of $2 can be issued for $20. Common stock dividends are expected to grow at a 7% rate.

Following is the capital structure for Perry:

                                                            Book Value                 Market Value

           Debt                                       400                             300

           Preferred Stock                      200                             200

           Common Equity                     400                            1,500

Using market values to determine the weight of each source of financing determine the weighted average cost of capital for Perry Corporation.

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