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A firm uses $30 million of debt, $10 million of preferred stock, and $60 million of common equity to finance its assets. If the before-tax cost of debt is 8%, cost of preferred stock is 10%, and the cost of common equity is 15%, calculate the weighted average cost of capital for the firm assuming a tax rate of 35%.

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TomShelby

Answer:

WACC 8.56000%

Explanation:

We will caclculate the WACC with Preferred Stock

[tex]WACC = K_e(\frac{E}{E+P+D}) + K_p(\frac{P}{E+P+D}) + K_d(1-t)(\frac{D}{E+P+D})[/tex]

D  30 millions

E  60 millions

P 10 milliions

V  100 millions

Ke 0.1

Equity weight 0.6 (60/100)

Kp 0.1

Preferred Weight  0.1 (10/100)

Kd 0.08

Debt Weight 0.3 (30/100)

t 0.35

[tex]WACC = 0.1(0.6) + 0.1(0.1)+0.08(1-0.35)(0.3)[/tex]

WACC 8.56000%

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