Final answer:
WACC, or Weighted Average Cost of Capital, is a financial metric that represents the average cost of capital for a company. It takes into account the cost of equity, preferred stock, and debt, weighted by their market values. In this case, the WACC is 28.64%.
Step-by-step explanation:
WACC, or Weighted Average Cost of Capital, is a financial metric that represents the average cost of capital for a company.
It takes into account the cost of equity, preferred stock, and debt, weighted by their respective market values.
To calculate WACC, you need to determine the proportion of each component in the company's capital structure and multiply it by its respective cost. Then, sum up the weighted costs to obtain the overall WACC.
In this case, the market value of common stock is 6.5 million shares * $14 per share = $91 million. The market value of preferred stock is $10 million, and the market value of bonds is 25,000 * 90% * $1,000 = $22.5 million.
- The cost of equity is 14%, so the equity component of WACC is 6.5 million / (6.5 million + 10 million + 22.5 million) * 14% = 0.1882 * 14% = 0.2635
- The cost of preferred stock is 10%, so the preferred stock component of WACC is $10 million / ($6.5 million + $10 million + $22.5 million) * 10% = 0.1039 * 10% = 0.0104.
- The cost of debt is 7.25%, so the debt component of WACC is $22.5 million / ($6.5 million + $10 million + $22.5 million) * 7.25% = 0.1726 * 7.25% = 0.0125.
Finally, sum up the weighted costs: WACC = Weight of Equity * Cost of Equity + Weight of Preferred Stock * Cost of Preferred Stock + Weight of Debt * Cost of Debt = 0.2635 + 0.0104 + 0.0125 = 0.2864 = 28.64%.