Answer:
10.53%
Explanation:
WACC = wE*rE + wP*rP + wD*rD(1-tax)
<u>Market values;</u>
Debt = 1.05 *5,000*1000 = 5,250,000
Preferred stock = 15,500 *107 = 1,658,500
Common equity = 105,000 *63 = 6,615,000
Total market value = 13,523,500
wE = 6,615,000/ 13,523,500 = 0.4891
wP= 1,658,500/13,523,500 = 0.1226
wD = 5,250,000/13,523,500 = 0.3882
<u>Cost of capital;</u>
Cost of common equity, rE using CAPM;
rE = 0.06 + (1.13*0.09) = 0.1617
rE = 16.17%
Cost of preferred stock = 6%
Cost of debt
using a financial calculator, input the following; N= 38, PV = -1050, PMT = 37.5,
FV =1000, then CPT I/Y = 3.51% . So annual rate = 3.51% *2 = 7.02%
WACC = (0.4891*0.1617) +(0.1226* 0.06) + [0.3882 *0.0702(1-0.31)]
WACC = 0.0791 + 0.007356 + 0.0188
WACC = 0.1053 or 10.53%
