A firm has a capital structure that uses 45% equity, 20% preferred shares, and 35% debt.The preferred shares have a current yield of 5.5%.The debt has a coupon rate of 10% and a current yield to maturity of 6.5%.The common shares have a yield of 8%.Ignoring income taxes, what is the firm's WACC?
A)6.575%
B)6.975%
C)7.275%
D)8.200%

Question

Quizplus · Accepted Answer

The firm's Weighted Average Cost of Capital (WACC) is calculated by multiplying the cost of each component by its proportional weight in the firm's capital structure and then summing those results. Here's the calculation:- Equity: 45% * 8% = 3.6%- Preferred Shares: 20% * 5.5% = 1.1%- Debt: 35% * 6.5% = 2.275%Adding these together: 3.6% + 1.1% + 2.275% = 6.975%

A Firm Has a Capital Structure That Uses 45% Equity