Melvin Ltd has the following equity structure: $\begin{array}{c}
\begin{array}{lll}
\
\text {Long-term debt}\
\text {Preference shares}\
\text {Ordinary shares}
\end{array}
\begin{array}{c}
\underline{\text { Market Value }} \
\$ 300,000 \
500,000 \
200,000
\end{array}
\begin{array}{c}
\underline{\text { Pretax Cost }} \
10 \% \
10 \
15
\end{array}
\begin{array}{c}
\underline{\text { After-Tax Cost }} \
6 \% \
10 \
15
\end{array}
\end{array}$
Melvin's weighted average cost of capital is:

Question

Melvin Ltd has the following equity structure: $\begin{array}{c}
\begin{array}{lll}
\
\text {Long-term debt}\
 \text {Preference shares}\
 \text {Ordinary shares} 
\end{array}
\begin{array}{c}
\underline{\text { Market Value }} \
\$ 300,000 \
500,000 \
200,000
\end{array}
\begin{array}{c}
\underline{\text { Pretax Cost }} \
 10 \% \
10 \
15
\end{array}
\begin{array}{c}
\underline{\text { After-Tax Cost }} \
6 \% \
10 \
15 
\end{array}
\end{array}$
 Melvin's weighted average cost of capital is:

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is calculated by multiplying the cost of each capital component by its proportional weight and then summing:$$ WACC = \frac{(\$300,000 \times 6\%) + (\$500,000 \times 10\%) + (\$200,000 \times 15\%)}{\$300,000 + \$500,000 + \$200,000} $$$$ WACC = \frac{(\$18,000 + \$50,000 + \$30,000)}{\$1,000,000} $$$$ WACC = \frac{\$98,000}{\$1,000,000} = 9.8\% $$

Melvin Ltd Has the Following Equity Structure Melvin's Weighted Average Cost of Capital Is: A) 12

Melvin Ltd Has the Following Equity Structure Melvin's Weighted Average Cost of Capital Is:
A) 12