You have gathered the following information for Frosty Ale, Inc., which has a 40 percent marginal tax rate.

You have gathered the following information for Frosty Ale, Inc., which has a 40 percent marginal tax rate.

  • 2 million common shares outstanding
  • 120,000 bonds outstanding
  • Current yield to maturity is 7%
  • Estimated market risk premium is 6%
  • Current common stock price is $25 per share
  • Current preferred stock price is $30 per share
  • 90,000 preferred shares outstanding
  • Estimated beta of stock is 1.2
  • 10 year U.S. Treasury yield is 4.8%
  • Annual preferred dividend is $3
  • Bonds are trading at par
  • Bonds have $1,000 face value

What is the firm’s weighted average cost of capital (WACC)? Be sure to very clearly label/identify each input or item and what you are doing to have the opportunity to receive partial credit.

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