65.0k views
0 votes
A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions:

Source of capital / Taget Market Proportions / After-Tax Cost
Long-term Debt/ 40% / 6%
Preferred Stock / 10% / 11
Common Stock Equity / 50 / 15
The weighted average cost of capital is__________.

1 Answer

4 votes

Answer:

11%

Step-by-step explanation:

The formula to compute WACC is shown below:

= Weightage of debt × after cost of debt + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of common stock) × (cost of common stock)

= (0.40 × 6%) + (0.10 × 11%) + (0.50 × 15%)

= 2.4% + 1.1% + 7.5%

= 11%

Simply we multiply the weightage with its cost so that the correct cost of capital can come based on weighted average

User Sukhveer Singh
by
7.4k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

9.4m questions

12.2m answers

Categories