Aaron's Rentals has 58,000 shares of common stock outstanding at a market price of $36 a share.The common stock just paid a $1.64 annual dividend and has a dividend growth rate of 2.8 percent.There are 12,000 shares of 6 percent preferred stock outstanding at a market price of $51 a share.The preferred stock has a par value of $100.The outstanding bonds mature in 17 years,have a total face value of $750,000,a face value per bond of $1,000,and a market price of $1,011 each.The bonds pay 8 percent interest,semiannually.The tax rate is 34 percent.What is the firm's weighted average cost of capital?

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Quizplus · Accepted Answer

R_E = [($1.64 × 1.028)/$36] + 0.028 = 0.074831R_p = (0.06 × $100)/$51 = 0.117647 WACC = ($2,088,000/$3,458,250)(0.074831) + ($612,000/$3,458,250)(0.117647) + ($758,250/$3,458,250)(0.078814)(1 - 0.34) = 7.74 percent

Aaron's Rentals Has 58,000 Shares of Common Stock Outstanding at a Market