Question

Company A has a target capital structure of 65% common equity, 30% debt, and 5% preferred stock. The cost of equity is 15.5%. The firm sells bonds at par value to yield an after-tax cost of 7.0%. The cost of preferred stock financing is estimated to be 11%. What is Company A's weighted average cost of capital?

Answer 1

Weight of Common Equity = 65%

Weight of Debt = 30%

Weight of Preferred Stock = 5%

Cost of Equity = 15.5%

Cost of Preferred Stock = 11%

Cost of Debt (After-Tax) = 7%

Weighted Average Cost of Capital = Weight of Equity* cost of equity + Weight of Debt* Cost of Debt (After-Tax) + Weight of Preferred Stock* Cost of Preferred Stock

Weighted Average Cost of Capital = 0.65*0.155 + 0.3*0.07 + 0.05*0.11= 12.725%

So the company A’s weighted average cost of capital is 12.725%