Final answer:
The weighted average cost of capital (WACC) is a financial metric that represents the overall cost of funds used for a company's operations and investments. It is calculated based on the company's capital structure, which includes the proportions of equity, preferred stock, and debt. Using the given information, the WACC can be calculated to be 4.275%.
Step-by-step explanation:
The weighted average cost of capital (WACC) is a financial metric that represents the overall cost of funds used for a company's operations and investments. It is calculated based on the company's capital structure, which includes the proportions of equity, preferred stock, and debt.
In this case, the company is financed with 0.2 equity, 0.1 preferred stock, and the remaining debt. The required rate of return on the debt is 3.00%. The corporate tax rate is 25%. To calculate the WACC, you need to use the weights of each component of the capital structure and the respective costs of each component.
Let's assume that the cost of equity is 10% and the cost of preferred stock is 7%. Here is how you can calculate the WACC:
- Multiply the weight of equity by the cost of equity. In this case, it would be 0.2 * 10% = 2%.
- Multiply the weight of preferred stock by the cost of preferred stock. In this case, it would be 0.1 * 7% = 0.7%.
- Calculate the after-tax cost of debt. Since the corporate tax rate is 25%, the after-tax cost of debt would be 3.00% * (1 - 0.25) = 2.25%.
- Multiply the weight of debt by the after-tax cost of debt. In this case, it would be 0.7 * 2.25% = 1.575%.
- Add the results from steps 1, 2, and 4 to get the WACC. In this case, it would be 2% + 0.7% + 1.575% = 4.275%.
So, the weighted average cost of capital (WACC) for the company is 4.275%.