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Jenkins Resources Inc. has the following capital
structure:
Proportion of Capital Structure
27%
Financing Source
Debentures (9% coupon, $1,000 par value,
12 year maturity)
Preferred stock ($2 dividend, $25 par value)
Common equity
Total
8
65
100%
a
Jenkins expects to raise future capital in the
proportions currently indicated on the balance
sheet. The current market price for Jenkins
debentures is $1,075. If new debentures were sold,
the issuance cost would be $20 per bond. The
current market price for the preferred stock is $19.
Issuance costs on new preferred stock would be $1
per share for a $25 par value issue. Issuance costs
on new equity would be $2.50 per share. The
current market price for Jenkins common stock is
$40. The stock pays a current (Do) dividend of $3.
This dividend is expected to grow at an annual
rate of 7 percent.
What is the weighted (marginal) cost of capital for
Jenkins Resources, assuming new capital is raised
in the proportions shown here and that all new
equity comes from the sale of new shares, new
debt comes from the sale of debentures, and new
preferred comes from the sale of preferred stock?
The firm's marginal tax rate is 40 percent.
