# Debreu Beverages and Stone Corp

Debreu Beverages has an optimal capital structure that is 50% common equity, 40% debt, and 10% preferred stock. Debreu's pretax cost of equity is 12%. It's pretax cost of preferred equity is 7%, and it's pretax cost of debt is also 7%. If the corporate tax rate is 35%, what is the weighed average cost of capital?

a) between 7% and 8%

b) between 8% and 9%

c) between 9% and 10%

d) between 10% and 12%

Given an optimal capital structure that is 50% debt and 50% common stock, calculate the weighted average cost of capital for Stone Corp given the following additional information:

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#### Solution Preview

Debreu Beverages has an optimal capital structure that is 50% common equity, 40% debt, and 10% preferred stock. Debreu's pretax cost of equity is 12%. It's pretax cost of preferred equity is 7%, and it's pretax cost of debt is also 7%. If the corporate tax rate is 35%, what is the weighed average cost of capital?

a) between 7% and 8%

b) between 8% and 9%

c) between 9% and 10%

d) between 10% and 12%

Answer: B

WACC = WdKd(1 - T) + WpKp + WcKs where Wd is the weight of ...

#### Solution Summary

This solution is comprised of a detailed explanation to calculate the weighted average cost of capital for Debreu Beverages and Stone Corp.