Calculate the weighted average cost of capital (WACC) for a firm with the following capital structure:
10% Preferred stock
50% Common equity
40% Debt
Tax rate 40%
Before tax cost of debt 12%
The cost of common equity is 15%
Cost of preferred stock 10%
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A. B. C. D. E.C
A firm's weighted average cost of capital (WACC) = the cost of each component of capital weighted by the proportion of that component in the firm's capital structure. In this case WACC = (after tax cost of debt x 40%) + (cost of common equity x 50%) + (cost of preferred stock x 10%) = (12% x 60% x 40%) + (15% x
50%) + (10% x 10%) = 2.88% + 7.5% + 1% = 11.38%.