What is the weighted-average cost of capital for a firm with the following sources of funds...

What is the weighted-average cost of capital for a firm with the following sources of funds and corresponding required rates of return: $15 million common stock at 15%, $5 million preferred stock at 9%, and $10 million debt at 6%. All amounts are listed at market values and the firm's tax rate is 35%.

A. 9.0%

B. 10.3%

C. 12.1%

D. 13.5%

E. 14.4%

*show work please

Expert Solution


Calculation of weighted average cost of capital
Source of funds	Market Value	Weight as per Market value	After tax Cost of capital	Multiplication
A	B	C	D	C * D
Common stock	15,000,000	0.50	15%	0.0750
Preferred stock	5,000,000	0.17	9%	0.0150
Debt	10,000,000	0.33	3.90%	0.0130
Weighted Average Cost of Capital				0.1030

WACC =	10.30%
The answer is Option B.

Working
After tax cost of debt = Cost of debt * (1-Tax rate) = 6% * (1-0.35) = 3.90%

jeff jeffy answered 2 years ago

Calculate the weighted average cost of capital for a firm with the following information:

Calculate the weighted average cost of capital for a firm with the following information: Marginal corporate tax rate: 25% Bonds with $1,000 face value with a 6% coupon rate with semi-annual payments matures in 10 years now sells for $928.94 Preferred stock dividend $5.50 Preferred stock price $55.00Current common stock dividend per share $1.50 Price per share of common stock $12.00 Floatation cost to sell new common stock ...

What is Weighted Average Cost of Capital?

Calculate the weighted average cost of capital for the following firm: it has $600000 in debt,...

Calculate the weighted average cost of capital for the following firm: it has $600000 in debt, $400000 in common stock and $200000 in preferred stock. It has a 4% cost of debt, 14% cost of common stock, 12% cost of preferred stock and a 34% tax rate.

What is the weighted average cost of capital for Foggy Futures Weather Forecasters? The firm is...

What is the weighted average cost of capital for Foggy Futures Weather Forecasters? The firm is in the 25% tax bracket. The optimal capital structure is listed below: Source of Capital Weight Long-Term Debt 45% Preferred Stock 5% Common Stock 50% Debt:The firm can issue $1,000 par value, 6% coupon interest bonds with a 15-year maturity date. The bond pays coupons payments semi-annually. The bond has an average discount of $55 and flotation costs of $20 per bond. The...

The weighted average cost of capital for a firm is the: A) discount rate which the...

The weighted average cost of capital for a firm is the: A) discount rate which the firm should apply to all of the projects it undertakes. B) overall rate which the firm must earn on its existing assets to maintain the value of its stock. C) rate the firm should expect to pay on its next bond issue. D) maximum rate which the firm should require on any projects it undertakes. E) rate of return that the firm's preferred stockholders...

What is Weighted Average Cost of Capital (WACC)?

Charlotte's Crochet Shoppe has 14,300 shares of common stock outstanding at a price per share of $75 and a rate of return of 11.61%. The company also has 280 bonds outstanding, with a par value of $2000 per bond. The pre-tax cost of debt is 6.13% and the bonds sell for 97.2% of the par. What is the weighted average cost of capital (WACC), if the tax rate is 40%?

The weighted average cost of capital is determined by _____ the weighted average cost of equity....

The weighted average cost of capital is determined by _____ the weighted average cost of equity. a. multiplying the weighted average aftertax cost of debt by b. adding the weighted average pretax cost of debt to c. adding the weighted average aftertax cost of debt to d. dividing the weighted average pretax cost of debt by e. dividing the weighted average aftertax cost of debt by

The weighted average cost of capital (WACC) is calculated as the weighted average of cost of...

The weighted average cost of capital (WACC) is calculated as the weighted average of cost of component capital, including debt, preferred stock and common equity. In general, debt is less expensive than equity because it is less risky to the investors. Some managers may intend to increase the usage of debt, therefore increase the weight on debt (Wd). Do you think by increasing the weight on debt (Wd) will reduce the WACC infinitely? What are the benefits and costs of...

How do we compute the weighted average cost of capital of a firm?

1) what is the cost of capital ? 2) what is the weighted average cost of...

1) what is the cost of capital ? 2) what is the weighted average cost of capital ? 3) what is cost of a) cost of debt? b) cost preferred stock ? c) cost of common stock ?

Question