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# Weighted average cost of Capital

WACC= (wd)(rd)(1-Tc)+(We)(re)+(Wp)(rp)

Wd = weight of debt in a firm's capital structure
rd = rate being paid for the firm's use of debt monies (marginal cost)
Tc = corporate tax rate
We = weight of equity
re = rate of equity (sometimes calculated in CAPM)
Wp = weight of preferred
rp = rate being paid on preferred stock

A company has a capital structure made up of 72% common stock equity and 14% preferred stock. The rate paid to preferred shareholders is 6.71%, while cost of equity capital is 13.96%. Bondholders make up the balance of the capital structure and the marginal cost of debt is calculated at 5.35% before the firm takes into account the 38% corporate tax rate. Using these figures, please determine the WACC.

#### Solution Preview

WACC= (wd)(rd)(1-Tc)+(We)(re)+(Wp)(rp)

Wd = weight of debt in a firm's capital structure
rd = rate being paid for the firm's use of debt monies (marginal cost)
Tc = corporate tax rate
We = weight of equity
re = rate of ...

#### Solution Summary

This provides the steps to calculate the Weighted average cost of Capital. The rate of being paid on preferred stocks are determined.

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