ECO 365 Corporate FinanceData Case 03Wilma Brinton is a new financial analyst at Dorrington Corporation, a company that had grownsteadily over the past 30 years and has now matured, being well known a

ECO 365 Corporate FinanceData Case 03Wilma Brinton is a new financial analyst at Dorrington Corporation, a company that had grownsteadily over the past 30 years and has now matured, being well known and highly respected.Brinton’s first task is to explain the concept of weighted average cost of capital to new membersof the Board of Directors.Dorrington’s balance sheet is summarized below.Assets Liabilities and net worthWorking capital $200 Bank loan $120Plant and equipment 360 Long-term debt 80Other assets 40 Preferred stock 100Common stock, incl. retained earnings 300Total $600 Total $600Brinton also made the following notes:1. Dorrington pays market interest rate (8%) on its bank loan. It has issued long-term bondswith a coupon of 7.75% and its market value is currently at par.2. The preferred stock was originally issued at $100 per share, and now trades for $70 pershare.3. The common stock last traded for $40 per share. Next year’s earnings per share would beabout $4, and dividends for share about $2. There are 10 million shares of common stockoutstanding.4. Earnings and dividends have grown steadily at 6.7% per year.5. Dorrington currently pays taxes at a 35% rate.Dorrington’s Beta has averaged 0.50 in the past 10 years. The interest rate on Treasuries iscurrently 7% and the market risk premium is 7%. Brinton intends to apply two methods forestimating the required return on equity.While studying the figures, a colleague of Brinton’s interrupted and made the followingsuggestions:1. Because Dorrington pays a dividend of $6 on preferred shares, the rate of return onpreferred stock should be 6%. Is the colleague correct?2. The colleague believes that Dorrington should easily be able to achieve a rate of return onequity of 16%. Is the colleague correct?Write a memo estimating Dorrington’s weighted average cost of capital and explaining how youreached the result.