A firm is using $30 million in debt, $10 million in preferred stock and $60 million in common equity to finance its assets. If the before tax cost of debt is 8%, cost of preferred stock is 10%, and the cost of common equity is 15%; calculate the weighted average cost of capital for the firm assuming a tax rate of 35%.
A) 12.4%
B) 11.56%
C) 10.84%
D) None of the above

Question

Quizplus · Accepted Answer

The WACC is calculated as follows:  WACC = (E/V * Re) + (D/V * Rd * (1-Tc)) + (P/V * Rp)  Where:  E = Market value of equity = $60 million  D = Market value of debt = $30 million  P = Market value of preferred stock = $10 million  V = E + D + P = $100 million  Re = Cost of equity = 15%  Rd = Cost of debt = 8%  Rp = Cost of preferred stock = 10%  Tc = Corporate tax rate = 35%  WACC = ($60/$100 * 15%) + ($30/$100 * 8% * (1-0.35)) + ($10/$100 * 10%)  WACC = 0.09 + 0.0156 + 0.01 = 11.56%

A Firm Is Using $30 Million in Debt, $10 Million