Metals Corp.has $2,575,000 of debt, $550 000 of preference share and $18,125,000 of common equity.Metals Corp.'s after-tax cost of debt is 5.25%, preference share 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?

Question

Quizplus · Accepted Answer

The correct answer is A because the weighted average cost of capital is calculated by multiplying the cost of each source of capital by its weight in the capital structure and then summing the results. In this case, the cost of debt is 5.25%, the cost of preference share is 6.35%, and the cost of common equity is 14.05%. The weight of debt is $2,575,000/$21,250,000 = 12.12%, the weight of preference share is $550,000/$21,250,000 = 2.59%, and the weight of common equity is $18,125,000/$21,250,000 = 85.29%. Therefore, the weighted average cost of capital is (12.12% x 5.25%) + (2.59% x 6.35%) + (85.29% x 14.05%) = 12.78%.