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 1 year ago

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