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Project WACC.

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The cost of capital for a project depends primarily on the:

firm's overall source of funds.
source of the funds used for the specific project.
current tax rate.
use of the funds.
firm's historical rates of return.

A company you are researching has common stock with a beta of 1.5. Currently, Treasury bills yield 3.2%, and the market portfolio offers an expected return of 12.5%. The company finances 35% of its assets with debt that has a yield to maturity of 7%. The firm also uses preferred stock to finance 15% of its assets. The preferred stock has a current price of $10 per share and pays a level $2 dividend. The firm is in the 33% tax bracket. What is the weighted average cost of capital?

13.22%
11.43%
10.94%
14.89%

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Solution Summary

This solution illustrates how to compute the weighted-average cost of capital. Includes an attached Excel file.

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