A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.
Source of Capital Target Market Proportions
Long Term Debt 25%
Preferred Stock 15%
Common Stock 60%
Total Firm Value 100%
Debt: The firm can sell a 10-year, RM1,000 par value, 6% bond for RM945.
Preferred Stock: The firm has determined it can issue preferred stock at RM70 per share par value. The stock will pay a RM8 annual dividend.
Common Stock: A firm's common stock is currently selling for RM19 per share.
The dividend expected to be paid at the end of the coming year is RM1.85. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was RM1.50. Additionally, the firm's marginal tax rate is 35%.
Determine the weighted average cost of capital for the firm.
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