Share
Explore BrainMass

Calculating Weighted Average Cost of Capital (WACC)

If a company finances its projects with 40 percent debt, 10 percent preferred stock, and 50 percent common stock.

1) The company can issue bonds at a yield to maturity of 8.4 percent.
2) The cost of preferred stock is 9 percent.
3) The company's common stock currently sells for $30 a share.
4) The company's dividend is currently $2.00 a share (D0 = $2.00), and is
expected to grow at a constant rate of 6 percent per year.
5) Assume that the flotation cost on debt and preferred stock is zero, and no
new stock will be issued.

The company's tax rate is 30 percent.
What is the company's weighted average cost of capital (WACC)?

Solution Preview

If a company finances its projects with 40 percent debt, 10 percent preferred stock, and 50 percent common stock.

1) The company can issue bonds at a yield to maturity of 8.4 percent.
2) The cost of preferred stock is 9 percent.
3) The company's common stock currently sells for $30 a share.
4) The company's dividend is currently $2.00 a share (D0 = $2.00), and is expected to grow at a constant rate of 6 percent per year.
5) Assume ...

Solution Summary

This solution is comprised of a detailed explanation to calculate WACC.

$2.19