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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 Preview

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

Solution Summary

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

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Calculating WACC (Weighted Average Cost of Capital)

See attached file for full problem description.

Company B has the present capital structure (see values and market data in attached file) which is considered optimal.

Calculate the company's weighted average cost of capital (WACC) using book value weights and market value weights.

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