Question

Global Technology’s capital structure is as follows: Debt 15 % Preferred stock 50 Common equity 35 The aftertax cost of debt is 6.00 percent; the cost of preferred stock is 10.00 percent; and the cost of common equity (in the form of retained earnings) is 13.00 percent. Calculate the Global Technology’s weighted cost of each source of capital and the weighted average cost of capital.

Answer 1

Global Technology's weighted costs for debt, preferred stock, and common equity are 0.9%, 5.0%, and 4.55%, respectively, and the Weighted Average Cost of Capital (WACC) is 10.45%.

Step-by-step explanation:

To calculate Global Technology’s weighted cost of each source of capital and the weighted average cost of capital (WACC), we use the proportions of each source of capital and their respective costs.

The weighted cost of debt is calculated as the proportion of debt in the capital structure multiplied by the aftertax cost of debt, which is 15% × 6.00% = 0.9%.

The weighted cost of preferred stock is the proportion of preferred stock in the capital structure multiplied by the cost of preferred stock, which is 50% × 10.00% = 5.0%.

The weighted cost of common equity is the proportion of common equity in the capital structure multiplied by the cost of common equity, which is 35% × 13.00% = 4.55%.

Adding these weighted costs together gives us the WACC: 0.9% + 5.0% + 4.55% = 10.45%.

Therefore, the weighted costs for debt, preferred stock, and common equity are 0.9%, 5.0%, and 4.55% respectively, and the WACC is 10.45%.

Answer 2

1. 0.9% ; 5% ; 4.55%

2. 10.45%

Step-by-step explanation:

Cost of equity = 13%

After tax cost of debt= 6%

Cost of preferred stock = 10%

Weight of debt = 15%

Weight of preferred stock = 50%

Weight of equity = 35%

Therefore;

1

•After tax weighted cost of debt = weight of debt × after tax cost of debt

= 0.15 × 0.06

= 0.009

= 0.9%

•Weighted preferred stock cost = Weight of preferred stock × cost of preferred stock

= 0.50 × 0.10

= 0.05

= 5%

•Weighted common equity stock cost = weight of equity × cost of equity

= 0.35 × 0.13

= 0.0455

= 4.55%

2.

• Weighted average cost of the firm

= After tax weighted cost of debt + Weighted preferred stock cost + Weighted common equity stock cost

= 0.9% + 5% + 4.55%

= 10.45%