Allen Corporation has the following equity structure: Market Value Cost
Long-term debt $700,000 15%
Preferred stock 50,000 5
Common stock 250,000 15
The weighted average cost of capital is

Question

Quizplus · Accepted Answer

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)Weight of debt = Market value of debt / (Market value of debt + Market value of preferred stock + Market value of common stock)= 700,000 / (700,000 + 50,000 + 250,000)= 0.7Cost of debt = 15%Weight of preferred stock = Market value of preferred stock / (Market value of debt + Market value of preferred stock + Market value of common stock)= 50,000 / (700,000 + 50,000 + 250,000)= 0.05Cost of preferred stock = 5%Weight of common stock = Market value of common stock / (Market value of debt + Market value of preferred stock + Market value of common stock)= 250,000 / (700,000 + 50,000 + 250,000)= 0.25Cost of common stock = 15%WACC = (0.7 * 0.15) + (0.05 * 0.05) + (0.25 * 0.15)= 0.145= 14.5%

Allen Corporation Has the Following Equity Structure: Market Value Cost