Blue Diamond Equipment has 80,000 bonds outstanding that are selling at par.Bonds with similar characteristics are yielding 6.75 percent.The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding.The preferred stock sells for $53 a share.The common stock has a beta of 1.34 and sells for $42 a share.The U.S.Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent.The corporate tax rate is 38 percent.What is the firm's weighted average cost of capital?

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The correct answer is A because the weighted average cost of capital (WACC) is 10.39 percent. The WACC is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc) + (P/V) * Rpwhere:E = market value of equityV = total value of the firmRe = cost of equityD = market value of debtRd = cost of debtTc = corporate tax rateP = market value of preferred stockRp = cost of preferred stockIn this case, the market value of equity is $105 million ($42 * 2.5 million), the total value of the firm is $180 million ($80 million + $105 million), the cost of equity is 11.56 percent, the market value of debt is $80 million, the cost of debt is 6.75 percent, the corporate tax rate is 38 percent, the market value of preferred stock is $39.75 million ($53 * 750,000), and the cost of preferred stock is 7 percent.Plugging these values into the WACC formula, we get:WACC = (105/180) * 11.56% + (80/180) * 6.75% * (1 - 0.38) + (39.75/180) * 7%WACC = 10.39%

Blue Diamond Equipment Has 80,000 Bonds Outstanding That Are Selling