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Edwards Resorts has a current capital structure that is 50% equity, 40% debt, and 10% preferred stock
Edwards Resorts has a current capital structure that is 50% equity, 40% debt, and 10% preferred stock. This is considered optimal in the capital structure. Edward is considering a $40 million capital budgeting project. Edward has estimated the following: - After-tax cost of debt: 8.5% - Cost of preferred stock: 9.5% - Cost of internal equity: 14.0% If all equity comes from internal sources, what should Edward's weighted average cost of capital (WACC) be for this project? 10.6796 11.35% 9.45% 12.15%
Expert Solution
weighted average cost of capital (WACC) = Weights of debt * after tax cost of debt + weight of equity * cost of equity + weight of preferred stock * cost of preferred stock
weighted average cost of capital (WACC) = 0.4*0.085 + 0.5*0.14 + 0.1*0.095
weighted average cost of capital (WACC) = 0.034 + 0.07 + 0.0095
weighted average cost of capital (WACC) = 0.1135 or 11.35%
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