2B4B KIELLY MACHINES INC. IS PLANNING AN EXPANSION PROGRAM ESTIMATED T...

130.

CSO: 2B4a

LOS:2B4b

Kielly Machines Inc. is planning an expansion program estimated to cost $100 million.

Kielly is going to raise funds according to its target capital structure shown below.

Debt

.30

Preferred stock

.24

Equity

.46

Kielly had net income available to common shareholders of $184 million last year of

which 75% was paid out in dividends. The company has a marginal tax rate of 40%.

Additional data:

•

The before-tax cost of debt is estimated to be 11%.

•

The market yield of preferred stock is estimated to be 12%.

•

The after-tax cost of common stock is estimated to be 16%.

What is Kielly’s weighted average cost of capital?

a.

12.22%.

b.

13.00%.

c.

13.54%.

d.

14.00%.