A firm uses $30 million of debt,$10 million of preferred stock,and $60 million of common equity to finance its assets.If the before-tax cost of debt is 8%,cost of preferred stock is 10%,and the cost of common equity is 15%,calculate the weighted average cost of capital for the firm assuming a tax rate of 35%.

Question

Quizplus · Accepted Answer

Weighted Average Cost of Capital (WACC) = (Cost of Debt x (1 - Tax Rate) x Weight of Debt) + (Cost of Preferred Stock x Weight of Preferred Stock) + (Cost of Common Equity x Weight of Common Equity)

WACC = (0.08 x (1 - 0.35) x 30/100) + (0.10 x 10/100) + (0.15 x 60/100) 
WACC = 0.0552 + 0.01 + 0.09 
WACC = 0.1152 or 11.56%

Therefore, the best choice is B.

A Firm Uses $30 Million of Debt,$10 Million of Preferred