Using rounded whole percents for the various costs and weighted costs, what is the weighted average cost of capital for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket. The optimal capital structure is listed below: ? $$\begin{array} { | l | l | }
\hline \text { S ource of Capital } & \text { W eight } \
\hline \text { Long-Term Debt } & 25 \% \
\hline \text { Preferred Stock } & 20 \% \
\hline \text { Common Stock } & 55 \% \
\hline
\end{array}$$ ? $\begin{array}{|l|l|}
\hline \text { Debt: }&\begin{array}{ll}
\text {The firm can issue \( \$ 1,000 \mathrm{p} $ ar value, $ 8 \% $ coupon interest bonds with a 20 -year }\\text {maturity date. The bond has an average discount of $ \$ 30 $ and flotation costs of }\\text { $ \$ 30 $ per bond. The selling price is $ \$ 1,000 $.}
\end{array}\
\hline \text {Preferred Stock: }&\begin{array}{ll}
\text {The firm can sell preferred stock with a dividend that is $ 8 \% $ of the current price. }\\text { The stock costs $ \$ 95 $. The cost of issuing and selling the stock is expected }\\text {to be $ \$ 5 $ per share. }
\end{array}\
\hline \text {Common Stock: }&\begin{array}{ll}
\text {The firm's common stock is currently selling for $ \$ 90 $ per share. }\\text {The firm's common stock is currently selling for $ \$ 90 $ per share. The firm expects to pay cash dividends }\\text { The dividends have been growing at $ 6 \% $. The stock must be discounted by $ \$ 7 $, }\\text {and flotation costs are expected to amount to $ \$ 5 $ per share. }
\end{array}\
\hline \text { Retained Earnings:}&\begin{array}{ll}
\text { The firm expects to have enough retained earnings in the coming year to be used}\\text { in place of any new stock being issued. }
\end{array}\
\hline
\end{array}\)

Question

Using rounded whole percents for the various costs and weighted costs, what is the weighted average cost of capital for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket. The optimal capital structure is listed below: ? $$\begin{array} { | l | l | } 
\hline \text { S ource of Capital } & \text { W eight } \
\hline \text { Long-Term Debt } & 25 \% \
\hline \text { Preferred Stock } & 20 \% \
\hline \text { Common Stock } & 55 \% \
\hline
\end{array}$$ ? $\begin{array}{|l|l|}
\hline \text { Debt: }&\begin{array}{ll}
\text {The firm can issue \( \$ 1,000 \mathrm{p} $ ar value, $ 8 \% $ coupon interest bonds with a 20 -year  }\\text {maturity date. The bond has an average discount of $ \$ 30 $ and flotation costs of }\\text {  $ \$ 30 $ per bond. The selling price is $ \$ 1,000 $.}
\end{array}\
\hline \text {Preferred Stock: }&\begin{array}{ll}
\text {The firm can sell preferred stock with a dividend that is $ 8 \% $ of the current price.  }\\text { The stock costs $ \$ 95 $. The cost of issuing and selling the stock is expected }\\text {to be $ \$ 5 $ per share. }
\end{array}\
\hline  \text {Common Stock: }&\begin{array}{ll}
\text {The firm's common stock is currently selling for $ \$ 90 $ per share.  }\\text {The firm's common stock is currently selling for $ \$ 90 $ per share. The firm expects to pay cash dividends  }\\text {  The dividends have been growing at $ 6 \% $. The stock must be discounted by $ \$ 7 $, }\\text {and flotation costs are expected to amount to $ \$ 5 $ per share. }
\end{array}\
\hline \text { Retained Earnings:}&\begin{array}{ll}
\text { The firm expects to have enough retained earnings in the coming year to be used}\\text { in place of any new stock being issued. }
\end{array}\
\hline 
\end{array}\)

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: $$WACC = (W_d \times r_d \times (1-T_c)) + (W_p \times r_p) + (W_e \times r_e)$$ where $W_d$, $W_p$, and $W_e$ are the weights of debt, preferred stock, and equity, respectively; $r_d$, $r_p$, and $r_e$ are the costs of debt, preferred stock, and equity, respectively; and $T_c$ is the corporate tax rate. Given the information, the cost of debt after taxes is lower due to the interest tax shield, the cost of preferred stock is straightforward to calculate based on its dividend and price, and the cost of equity can be estimated using the dividend discount model or given growth rates. Without specific numerical calculations provided in the question, the correct answer is chosen based on understanding the conceptual framework of WACC.

Using Rounded Whole Percents for the Various Costs and Weighted