Step-by-step explanation:
Calculate the cost of debt.
The cost of debt is the yield to maturity (YTM) on the company's bonds.
In this case, the YTM is 8%.
However, the company's tax rate is 30%, so the after-tax cost of debt is 8% * (1 - 0.30) = 5.6%.
Calculate the cost of equity.
The cost of equity is the expected return that investors require for holding the company's stock.
One way to estimate the cost of equity is to use the dividend discount model (DDM).
In the DDM, the cost of equity is equal to the dividend yield plus the growth rate of dividends.
In this case, the dividend yield is $1.50 / $15.00 = 10%.
The growth rate of dividends is expected to be 2%.
Therefore, the cost of equity is 10% + 2% = 12%.
Calculate the cost of preferred stock.
The cost of preferred stock is the dividend yield on preferred stock.
In this case, the dividend yield is $2 / $10 = 20%.
Weight the costs of debt, equity, and preferred stock according to their market values.
The market value of debt is $5,000 * 1.05 = $5,250.
The market value of common stock is 3,000 * $15 = $45,000.
The market value of preferred stock is 200 * $10 = $2,000.
Therefore, the weights for debt, equity, and preferred stock are 0.12, 0.84, and 0.04, respectively.
Calculate the WACC.
The WACC is the weighted average of the costs of debt, equity, and preferred stock.
In this case, the WACC is 0.12 * 5.6% + 0.84 * 12% + 0.04 * 20% = 9.76%.
Therefore, the weighted average cost of capital for Dewpoint Inc. is 9.76%.
Here is the formula for calculating WACC:
WACC = Σ(Weighti * Cost of Capitali)
where:
Σ is the sum of
Weighti is the weight of the ith source of capital
Cost of Capitali is the cost of the ith source of capital