Question

A company has a cost of debt of 7.74%, a cost of common equity of 11.94%, and a cost of preferred stock of 8.84%. All three costs are before taxes. The company has 104,000 shares of common stock outstanding at a market price of $28.50 a share. There are 40,000 shares of preferred stock outstanding at a market price of $42.10 a share. The bond issue has a total face value of $500,000 and sells at 101.5% of face value. The corporate tax rate is 34 %. What is the weighted average cost of capital for this company?

	9.49%
	9.74%
	10.00%
	10.25%
	10.51%

Answer 1

After-tax cost of debt = cost of debt ×(1-tax rate)
=0.0774× (1-0.34)
5.11%
1684000
Value of equity = 104000*28.50 =2964000
Value of preferred stock = 40000*$42.10 =1684000
Value of debt =$500000*101.5% =502500
Mode	Value	Weight	Cost	WACC
a	b	c =b/5155500	d	e=c*d
Common stock	$      29,64,000	0.57	11.94%	6.86%
Preferred stock	$      16,84,000	0.33	8.84%	2.89%
Debt	$         5,07,500	0.10	5.11%	0.50%
Total	$      51,55,500	1.00		10.25%
Correct Answer =10.25%