Answer:
(a) 1.275%
; 6.25%
; 5.425%
(b) 12.95%
Explanation:
Given that,
After tax Cost of debt = 8.5%
Cost of preferred stock = 12.50%
Cost of Equity = 15.50%
Weight of debt = 15%
Weight of preferred stock = 50%
Weight of equity = 35%
After tax Weighted debt cost = Weight of debt × After tax Cost of debt
= 0.15 × 8.50%
= 1.275%
Weighted preferred stock cost = Weight of preferred stock × Cost of preferred stock
= 0.50 × 12.50%
= 6.25%
Weighted common equity stock cost = Weight of equity × Cost of Equity
= 0.35 × 15.50%
= 5.425%
Weight average cost of the firm:
= After tax Weighted debt cost + Weighted preferred stock cost + Weighted common equity stock cost
= 1.275% + 6.25% + 5.425%
= 12.95%
Note: The values of Debt, preferred stock and common equity are rearranged.
