If a firm has total long-term capital of $1,000,000,preferred stock of $500,000,preferred dividends of $10 and preferred stock price of $100,the weighted cost of capital is:
A)50%
B)10%
C)5%
D)cannot tell from this information

Question

Quizplus · Accepted Answer

Weighted cost of capital can be calculated by adding up the cost of each capital component weighted by its proportional amount in the total capital structure. In this case, we have only given information about the preferred stock component, which has a cost of 10/100 = 10%. Therefore, the weighted cost of capital is only based on preferred stock, which is 5% ($500,000/$1,000,000 x 10%). We cannot incorporate any other capital component, so we cannot determine the total weighted cost of capital.

If a Firm Has Total Long-Term Capital of $1,000,000,preferred Stock