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Finance: Weighted average cost of capital.

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Question 1
Mr. Fredwick's capital structure is 25% debt, 25% preferred stock and 50% common stock (current market values). His capital structure is 20% debt, 20% preferred stock and 60% common stock (current book values). The rate of return of each component of the capital structure is 10% on debt, 12% on preferred stock and 18% on common stock. The tax rate is 35%. What is the WACC of the company?

Question 2
How should the WACC of a company or project be determined or used? How do we measure the discount rate for a project with the same risk as the whole company and the project with a different risk from the whole company? If a project is a brand new project, how should we set the discount rate for the project? Please provide a thorough answer with examples please to assist in understanding.

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Solution Summary

The problem deals with estimating the weighted average cost of capital under different situations.

Solution provided by:
Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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