Sun Lee Importers has a cost of debt of 9 %, a cost of equity of 14 %, and a cost of preferred stock of 10 %. The firm has 87,000 shares of common stock outstanding at a market price of $27 a share. There are 30,000 shares of preferred stock outstanding at a market price of $41 a share. The bond issue has a total face value of $750,000 and sells at 99 % of face value. The company's tax rate is 35 %. What is the weighted average cost of capital for Sun Lee Importers?

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is calculated using the formula: WACC = (E/V * Re) + (P/V * Rp) + (D/V * Rd * (1-Tc)), where E is the market value of equity, P is the market value of preferred stock, D is the market value of debt, V is the total market value of the firm's financing (E + P + D), Re is the cost of equity, Rp is the cost of preferred stock, Rd is the cost of debt, and Tc is the tax rate. Calculating each component and substituting into the formula gives a WACC of approximately 11.46%.

Sun Lee Importers Has a Cost of Debt of 9