AI Hansen, the newly appointed vice
president of finance of Berkshire Instruments,
was eager to talk to his investment
banker about future financing for the firm.
One of AI's first assignments was to
determine the firn1's cost of capital. In
assessing the weights to use in computing
the cost of capital, he examined the current
balance sheet, presented in Figure I.
In their discussion, AI and his investment
bal1kcr determined that the current mix in
the capital structure was ver:-' close to
optimal and that Berkshire Instruments
should continue with it in the future. Of
some concern was the appropriate cost to
assign to each of the elements in the capital
structure. AI Hansen requested that his
administrative assistant provide data on
what the cost ot issue debt and preferred
stock had been in the past. T11e information
is provided in Figure 2.