Question

Global Technology’s capital structure is as follows:

Answer 1

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.