Consider the following information:
Borrowing Rate 10%
Marginal Tax Rate 40%
Preferred Stock Par Price $50 -
Preferred Dividend $5 -
Preferred Stock floatation cost 2.0%
Cost of common equity 15.0%
Preferred Stock issued at Par -
The Optimal Capital Structure is 45% debt, 50% common equity, and 5% preferred stock. Credit Rating BB+
What is the firm's Weighted Average Cost of Capital (WACC)?
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A. B. C. D. E. F.D
The firm's Weighted Average Cost of Capital (WACC) is a weighted average of the component cost of capital. In this case 10%(borrowing rate) x (1-.4)Tax savings
= 6% is the component cost of debt. $5 (preferred dividend) / 49(Par minus floatation cost) = 10.2% is the component cost of preferred stock. Thus the WACC =
.45(6%) + .5(15%) + .05(10.2%) = 10.71%