Metals Corp. has $2,575,000 of debt, $550,000 of preferred stock, and $18,125,000 of common equity. Metals Corp.'s after-tax cost of debt is 5.25%, preferred stock has a cost of 6.35%, and newly issued common stock has a cost of 14.05%. What is Metals Corp.'s weighted average cost of capital?

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Quizplus · Accepted Answer

The correct answer is A. The weighted average cost of capital (WACC) is calculated as follows:WACC = (Weight of debt * Cost of debt) + (Weight of preferred stock * Cost of preferred stock) + (Weight of common equity * Cost of common equity)Weight of debt = Debt / (Debt + Preferred stock + Common equity)= $2,575,000 / ($2,575,000 + $550,000 + $18,125,000)= 0.125Weight of preferred stock = Preferred stock / (Debt + Preferred stock + Common equity)= $550,000 / ($2,575,000 + $550,000 + $18,125,000)= 0.027Weight of common equity = Common equity / (Debt + Preferred stock + Common equity)= $18,125,000 / ($2,575,000 + $550,000 + $18,125,000)= 0.848WACC = (0.125 * 5.25%) + (0.027 * 6.35%) + (0.848 * 14.05%)= 0.656% + 0.172% + 11.944%= 12.78%