Viduka is a constant growth firm with a dividend growth rate of 8%. It just paid out a dividend of $2.00 per share. Its common stock currently sells for $27.00 ashare with a beta of 1.2. A floatation cost of 10% would be required to issue new common stock. The company's preferred stock pays a fixed annual dividend of $2.00 a share. The preferred stock currently sells for $25 a share. To raise new capital, the company can issue a 20- year, 8.5% annual coupon bond that sells for $945. Viduka's marginal tax rate is 40%. Its target capital structure consists of 40% debt, 40% common equity, and 20% preferred stock. Currently, the risk-free rate is 6% and the market risk premium is 5%. 1. What is the company's cost of debt?
