The target capital structure for Jowers Manufacturing is 50 percent common stock, 15 percent preferred

The target capital structure for Jowers Manufacturing is 50 percent common stock, 15 percent preferred stock, and 35 percent debt. If the cost of equity for the firm is 20 percent, the cost of preferred stock is 12 percent, and the before-tax cost of debt is 10 percent, what is Jower’s cost of capital? The firm’s marginal tax rate is 34 percent.

SOLUTION PREVIEW

Source of capital	Proportion of capital (a)	Cost of capital (b)	Total cost ( a x b)
Common stock	50%	20%	10.000%
Preferred stock	15%	12%	1.800%

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