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Calculating WACC: What is the weighted average cost of capital?

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A company you are researching has common stock with a beta of 1.25. Currently, Treasury bills yield 4%, and the market portfolio offers an expected return of 13%. The company finances 20% of its assets with debt that has a yield to maturity of 6%. The firm also uses preferred stock to finance 30% of its assets. The preferred stock has a current price of $10 per share and pays a level $1.00 dividend. The firm is in the 35% tax bracket. What is the weighted average cost of capital?

Answer
12.76%
11.41%
15.97%
13.62%
19.40%

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Solution Summary

This solution provides formula and calculations for WACC in the given case.

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Return on common stock=rc=4%+1.25*(13%-4%)=15.25%
Cost of debt=rd=6%
Cost of ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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