Question

Assume that a for-profit company has $8 million of long-term debt with an interest rate of 6%. It has $3 million of preferred stock with a required dividend rate of 8%. And it has $4 million of common stock that is estimated to have a cost of capital of 10%. What is its weighted average cost of capital? In order for your answer to be graded correctly, Do not use any symbols (e.g. $) or comma. Use only numeric values. For example, if your answer is $123,456, then in the boxes below you should type 123456.

Answer 1

Weighted average cost of capital = [Cost of debt *proportion of debt] + [Cost of equity * Proportion of equity]+[Cost of preferred stock* proportion of preferred stock]

Debt =8 million

Preferred stock = 3 million

Common stock = 4 million

Total fund = 8+3+4 = 15 million

Proportion of debt = debt/ total fund = 8/15

Proportion of equity = equity/ total fund = 4/15

Proportion of preferred stock = preferred stock / total fund = 3/15

Cost of debt =6%

Cost of equity =10%

Cost of preferred stock = 8%

Weighted average cost of capital = [6*8/15]+[10*4/15]+[8*3/15]

Weighted average cost of capital = 3.20+2.67+1.60 = 7.47%