Question

The Milton Teapot Company (MTC) is beginning its capital budgeting process for the
year. The first step in this process is to find the firm's current weighted average cost of
capital (WACC). MTC's balance sheet is shown below:
MTC Balance Sheet ($000)
Current Assets 500 Debt 750
Preferred Stock 500
Fixed Assets 2,000 Common Equity 1,250
Total Assets 2,500 Total Liabilities & Owners Equity 2,500
The cost of MTC's debt is 10%. MTC's $6 preferred stock has a market price of $40 per
share while the common stock is selling for $20 per share. The common stock just paid
a dividend of $2 per share (which is in accord with the long run average growth rate of
dividends of 8% per year). MTC pays taxes at a combined average rate of 30%. What
is MTC's WACC?

Answer 1