Question

"A firm finances itself with 30 percent debt, 60 percent common equity, and 10 percent preferred stock. The before-tax cost of debt is 5 percent, the firm's cost of common equity is 15 percent, and that of preferred stock is 10 percent. The marginal tax rate is 30 percent. What is the firm's weighted average cost of capital

Answer 1

Answer:

WACC = Ke(E/V) + Kd(D/V)(1-T)  + Kp(P/V)

WACC = 15(60/100) + 5(30/100)(1-0.3) + 10(10/100)

WACC = 9 + 1.05 + 1

WACC = 11.05%

Explanation:

Weighted average cost of capital is a function of cost of common stock and the proportion of common stock in the capital structure plus after-tax cost of debt and proportion of debt in the capital structure plus cost of preferred stock and the proportion of preferred stock in the capital structure.  Ke = Cost of equity or common stock, kd = cost of debt and kp = cost of preferred stock.