If a company has a capital structure of $5,000,000 common stock with a cost of 17%, $2,000,000 bonds at 4%, $1,000,000 of short term debt with a cost of 7%, and $2,000,000 preferred stock with a cost of 3%, what is the weighted average cost of Capital?

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Business

Tanya Terry

16 May, 04:27

If a company has a capital structure of $5,000,000 common stock with a cost of 17%, $2,000,000 bonds at 4%, $1,000,000 of short term debt with a cost of 7%, and $2,000,000 preferred stock with a cost of 3%, what is the weighted average cost of Capital?

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Avila · Answer 1

Weighted Average Cost of Capital; formula is as follows;

WACC = wE*re + wP*wp + wD*rd (1-tax)

where w = weight of ...

r = cost of ...

E = common equity

P = preferred stock

D = Debt

Find the weights of each source of capital;

WACC = (0.50*0.17) + (0.20*0.03) + [0.20*0.04 (1-0.40) ] + [0.10*0.07 (1-0.40) ]

WACC = 0.085 + 0.006 + 0.0048 + 0.0042

WACC = 0.1 or 10%