Answer:
the weighted average cost of capital is 9.22 %.
Explanation:
Weighted average cost of capital is the weighted return required by all providers of <u>permanent sources</u> of finance to the Company.
<em>WACC = ke × (e/v) + kp × (p/v) + kd × (d/v)</em>
where,
ke = cost of equity
= 12.40 %
e/v = weight of equity
= ($22 × 105,000) ÷ ($22 × 105,000 + $45 × 25,000 + $1,500,000 × 98%)
= 0.4709
kp = cost of preference stock
= 8.00 %
p /v = weight of preference stock
= ($45 × 25,000) ÷ ($22 × 105,000 + $45 × 25,000 + $1,500,000 × 98%)
= 0.2294
kd = cost of debt
= Interest × ( 1 - tax rate)
= 7.80 % × (1 - 0.34)
= 5.148%
d/v = weight of debt
= ($1,500,000 × 98%) ÷ ($22 × 105,000 + $45 × 25,000 + $1,500,000 × 98%)
= 0.2997
Therefore,
WACC = 12.40 % × 0.4709 + 8.00 % × 0.2294 + 5.148% × 0.2997
= 9.22 %
