Question

Sara's Cafe has the following capital structure:

Bonds   $450 million

Preferred Stock $300 million

Common stock $500 million

Retained Earnings $250 million

The specific costs of capital are as followsl:

Bonds 6.2%

Preferred Stock 7.4%

Common Stock 16.8%

Retained Earnings 14.9%

Calculate the WACC.

Answer 1

The WACC is computed as shown below:

= cost of debt x weight of debt + cost of preferred stock x weight of preferred stock + cost of common stock x weight of common stock + cost of retained earnings x weight of retained earnings

= 0.062 x $ 450 million / ( $ 450 million + $ 300 million + $ 500 million + $ 250 million) + 0.074 x $ 300 million / ( $ 450 million + $ 300 million + $ 500 million + $ 250 million) + $ 0.168 x $ 500 million / ( $ 450 million + $ 300 million + $ 500 million + $ 250 million) + 0.149 x $ 250 million / ( $ 450 million + $ 300 million + $ 500 million + $ 250 million)

= 0.062 x 0.3 + 0.074 x 0.2 + 0.168 x 0.3333333 + 0.149 x 0.16666666

= 11.42% Approximately

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