Debreu Beverages has an optimal capital structure that is 70% common equity, 20% debt, and 10% preferred stock. Debreu's pretax cost of equity is 9%. Its pretax cost of preferred equity is 7%, and its pretax cost of debt is also 5%. If the corporate tax rate is 35%, what is the weighed average cost of capital?

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Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is the average cost of capital for a company, taking into account the cost of each type of capital and the proportion of each type of capital in the company's capital structure. The WACC is calculated as follows:WACC = (Cost of equity * Proportion of equity) + (Cost of debt * Proportion of debt) + (Cost of preferred stock * Proportion of preferred stock)In this case, the cost of equity is 9%, the proportion of equity is 70%, the cost of debt is 5%, the proportion of debt is 20%, the cost of preferred stock is 7%, and the proportion of preferred stock is 10%. Therefore, the WACC is:WACC = (0.09 * 0.70) + (0.05 * 0.20) + (0.07 * 0.10) = 0.083Therefore, the WACC is between 8% and 9%.

Debreu Beverages Has an Optimal Capital Structure That Is 70