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The CFO of your company gives you the following information and asks you to complete the calculation of your company's weighted average cost of capital
The CFO of your company gives you the following information and asks you to complete the calculation of your company's weighted average cost of capital. Long-term Debt has a market value of $20,000,000 and an after-tax cost of 7.00%; Preferred Stock has a market value of $4,000,000 with an after-tax cost of 5.00%; Common Stock has a market value of $30,000,000 and an after-tax cost of 16.0%. Your company's weighted average cost of capital is...
Expert Solution
Total market value = 20,000,000 + 4,000,000 + 30,000,000 = 54,000,0000
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) = (20,000,000 / 54,000,0000)*0.07 + (30,000,000 / 54,000,0000)*0.16 + (4,000,000 / 54,000,0000)*0.05
weighted average cost of capital (WACC) = 0.02593 + 0.08889 + 0.0037
weighted average cost of capital (WACC) = 0.1185 or 11.85%
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