Following is an excerpt from Albion Corporation’s balance sheet.
Long-term debt (9% interest rate) $30,000,000
Preferred stock (100,000 shares, 12% dividend) 10,000,000
Common stock (5,000,000 shares outstanding) 60,000,000
Albion’s bonds are currently trading at $1,083.34, reflecting a yield to maturity of 8%.
The preferred stock is trading at $125 per share. Common stock is selling at $16 per
Share, and Albion’s treasurer estimates that the firm’s cost of equity is 17%. If Albion’s
Effective income tax rate is 40%, what is the firm’s cost of capital?