Martin Corporation has the following equity structure: Market Value Pretax Cost After-Tax Cost
Long-term debt $300,000 10% 6%
Preferred stock 500,000 10 10
Common stock 200,000 15 15
Martin's weighted average cost of capital is:

Question

Quizplus · Accepted Answer

The correct answer is A because the weighted average cost of capital is calculated as follows:WACC = (Weight of debt * Cost of debt) + (Weight of preferred stock * Cost of preferred stock) + (Weight of common stock * Cost of common stock)WACC = (300,000/1,000,000 * 0.10) + (500,000/1,000,000 * 0.10) + (200,000/1,000,000 * 0.15)WACC = 0.03 + 0.05 + 0.03WACC = 0.11 or 11%

Martin Corporation Has the Following Equity Structure: Market Value Pretax