JG Enterprises has 50 million shares, trading at $4 a share; the cost of equity is
12%. It has debt with a market value of $ 100 million and a pre-tax cost of debt
of 6%. Finally the company has $100 million in market value of preferred stock;
the preferred shares are trading at $80 a share, with an annual preferred dividend of $6/share. If the marginal tax rate is 40%, estimate the cost of capital
for the firm.
First, compute the preferred dividend yield, which is also the cost of
• Preferred dividend yield = $6/80 = 7.5%
• Cost of capital = 12%(200/400)+ 6%(1-.4)(100/400)+7.5%(100/400) =