Allen Corporation has the following equity structure: $$\begin{array} { l c l }
& \text { Market Value } & \text { After Tax Cost } \
\text { Long-term debt } & \$ 700,000 & 15 \% \
\text { Preferred stock } & 50,000 & 5 \
\text { Common stock } & 250,000 & 15
\end{array}$$ The weighted average cost of capital is
A) 14.5%
B) 8.2%
C) 8.7%
D) 10.3%

Question

Allen Corporation has the following equity structure: $$\begin{array} { l c l } 
& \text { Market Value } & \text { After Tax Cost } \
\text { Long-term debt } & \$ 700,000 & 15 \% \
\text { Preferred stock } & 50,000 & 5 \
\text { Common stock } & 250,000 & 15
\end{array}$$ The weighted average cost of capital is
A) 14.5%
B) 8.2%
C) 8.7%
D) 10.3%

Quizplus · Accepted Answer

The weighted average cost of capital is calculated as follows:WACC = (Weight of debt * After-tax cost of debt) + (Weight of preferred stock * After-tax cost of preferred stock) + (Weight of common stock * After-tax cost of common stock)WACC = (0.7 * 0.15) + (0.05 * 0.05) + (0.25 * 0.15)WACC = 0.105 + 0.0025 + 0.0375WACC = 0.145 or 14.5%

Allen Corporation Has the Following Equity Structure The Weighted Average Cost of Capital Is A) 14

Allen Corporation Has the Following Equity Structure The Weighted Average Cost of Capital Is
A) 14