Answer:
11.03 %
Explanation:
Cost of Capital = Cost of equity x Weight of Equity + Cost of Preferred Stock x Weight of Preferred Stock + Cost of Debt x Weight of Debt.
where,
Cost of equity = 12.80 %
Cost of Preferred Stock = 8.20 %
Cost of Debt = 8.20 x (1 - 0.40) = 4.92 %
also,
Total Market Value = 34,000 x $83 + 7,500 x $97.00 + $416,000 x 113%
= $2,822,000 + $727,500 + $470,080
= $4,019,580
Weight of Equity = $2,822,000 ÷ $4,019,580 = 0.70
Weight of Preferred Stock = $727,500 ÷ $4,019,580 = 0.18
Weight of Debt = $470,080 ÷ $4,019,580 = 0.12
therefore,
Cost of Capital = 12.80 % x 0.70 + 8.20 % x 0.18 + 4.92 % x 0.12
= 11.03 %
