Question

Your colleague started to calculate the weighted average cost of capital for your company, but suddenly became ill and had to go home. The Vice President of Finance gives you the following information and asks you to complete the calculation of the weighted average cost of capital. The market values and after-tax costs are as follows: Debt, $42,000,000 and 7.65%; Preferred stock, $6,300,000 and 5.00%; Common stock, $50,000,000 and 17.80%. Your company's weighted average cost of capital is:

Answer 1

12.64%

Step-by-step explanation:

WACC is the average cost of capital of the firm based on the weightage of the debt and weightage of the equity multiplied to their respective costs. weightage can be calculated by using the market value of the equity and debt.

The formula for WACC is

Weighted average cost of capital = ( Cost of Common Stock x Weightage of equity ) + ( Cost of debt x Weightage of debt ) + ( Cost of Preferred stock x Weightage of Preferred stock )

As per given data

Debt, $42,000,000 7.65%

Preferred stock, $6,300,000 5.00%

Common stock, $50,000,000 17.80%

Total $98,300,000

Placing Value in the formula

Weighted average cost of capital = ( 17.80% x $50,000,000 / $98,300,000 ) + ( 7.65% x $42,000,000 / $98,300,000 ) + ( 5.00% x $6,300,000 / $98,300,000 )

Weighted average cost of capital = 9.05% + 3.27% + 0.32 = 12.64%