Reading Foods is interested in calculating its weighted average cost of capital (WACC). The company’s CFO has collected the following information:
• The target capital structure consists of 40 percent debt and 60 percent common stock.
• The company has 20-year noncallable bonds with a par value of $1,000, a 9 percent annual coupon, and a price of $1,075.
• Equity flotation costs are 2 percent.
• The company’s common stock has a beta of 0.8.
• The risk-free rate is 5 percent.
• The market risk premium is 4 percent.
• The company’s tax rate is 40 percent.
• The company plans to use retained earnings to finance the equity portion of its capital structure, so it does not intend to issue any new common stock.
What is the company’s WACC? You must show your work!