An entity has a tax rate of 35% and a capital structure consisting of 40% noncurrent debt, 20% preferred stock, and 40% common equity. The before-tax cost of capital for these components are 8%, 13%, and 17%, respectively. What is the entity's weighted-average cost of capital?

11.48%

Explanation:

The computation of the entity's weighted-average cost of capital is shown below:

= Weightage of debt * cost of debt * (1 - tax rate) + (Weightage of preferred stock) * (cost of preferred stock) + (Weightage of common stock) * (cost of common stock)

= (0.4 * 8%) * (1 - 35%) + (0.20 * 13%) + (0.40 * 17%)

= 2.08% + 2.6% + 6.8%

= 11.48%

Simply we multiplied the weighatge with each capital structure