Question

A firm uses $30 million of debt, $10 million of preferred stock, and $60 million of common equity to finance its assets. If the before-tax cost of debt is 8%, cost of preferred stock is 10%, and the cost of common equity is 15%, calculate the weighted average cost of capital for the firm assuming a tax rate of 35%.

Answer 1

WACC 8.56000%

Step-by-step explanation:

We will caclculate the WACC with Preferred Stock

`WACC = K_e((E)/(E+P+D)) + K_p((P)/(E+P+D)) + K_d(1-t)((D)/(E+P+D))`

D 30 millions

E 60 millions

P 10 milliions

V 100 millions

Ke 0.1

Equity weight 0.6 (60/100)

Kp 0.1

Preferred Weight 0.1 (10/100)

Kd 0.08

Debt Weight 0.3 (30/100)

t 0.35

`WACC = 0.1(0.6) + 0.1(0.1)+0.08(1-0.35)(0.3)`

WACC 8.56000%