McDuffs' Moving and Storage has a capital structure which includes 1.5 million common shares selling at $15.00 per share with a dividend of $1.70 and a growth in dividends of 1.1% per year. Its newly issued 300,000 preferred shares have an issue and market price of $50, a term of 5 years and a fixed dividend of $4.50. McDuffs' nominal $40 million debt is perpetual with a interest rate of 7% and selling at $92 per $100 of nominal value. The company's tax rate is 28%. Using trial values of 6% and 12%, what is the company's weighted average cost of capital?

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is calculated by weighting the cost of each component of capital (equity, preferred stock, and debt) by its proportion in the total capital structure and adjusting for taxes. The calculation involves determining the cost of equity using the dividend discount model (for common shares), the cost of preferred stock, and the after-tax cost of debt, then combining these costs proportionally.

McDuffs' Moving and Storage Has a Capital Structure Which Includes