What is the weighted average cost of capital for Mud Bug Corporation? ? $$\begin{array} { l l r }
\text { Source of Capital } & \text { Capital Components } & \text { Cost } \
\text { Long-Term Debt } & \$ 60,000 & 5.6 \% \
\text { Preferred Stock } & \$ 15,000 & 10.6 \% \
\text { Common Stock } & \$ 75,000 & 13.0 \%
\end{array}$$

Question

What is the weighted average cost of capital for Mud Bug Corporation? ? $$\begin{array} { l l r } 
\text { Source of Capital } & \text { Capital Components } & \text { Cost } \
\text { Long-Term Debt } & \$ 60,000 & 5.6 \% \
\text { Preferred Stock } & \$ 15,000 & 10.6 \% \
\text { Common Stock } & \$ 75,000 & 13.0 \%
\end{array}$$

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 the results. Here, the total capital is $150,000 ($60,000 + $15,000 + $75,000). The weights of the long-term debt, preferred stock, and common stock are 40% ($60,000/$150,000), 10% ($15,000/$150,000), and 50% ($75,000/$150,000), respectively. Thus, WACC = (0.40 * 5.6%) + (0.10 * 10.6%) + (0.50 * 13.0%) = 2.24% + 1.06% + 6.5% = 9.8%.

What Is the Weighted Average Cost of Capital for Mud