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Weighted Average Cost of Capital

1. A company capital structure is
Debt..........................35%
Preferred stock...........15%
Common equity..........50%

The after-tax cost of debt is 6.5 percent; the cost of preferred stock is 10 percent; and the cost of common equity (form of retained earnings) is 13.5 percent.

Calculate the weighted average cost per capital.

2. Assume that Rf = 5 percent and Km = 10.5 percent. Compute Kj for the following betas using the formula listed below.

a. 0.6
b. 1.3
c. 1.9

Formulas

Kj = Rf + B (Km - Rf)
Rf = Risk free rate of return
B = Beta coefficient ([Kj = a + BKm + e]
Kj = Return on individual common stock of a company
a = Alpha, the intercept on the y-axis
B= Beta, the coefficient
Km - Rf = Premium or excess return of the market versus the risk-free rate.
B (Km - Rf) = Expected rate of return above the risk-free rate for the stock

Solution Preview

Problem 1
The weighted average cost of capital is equal to debt proportion * after tax cost of debt + preferred stock proportion * cost of preferred stock + common ...

Solution Summary

This solution calculates the weighted cost of capital and the rate of return for a set of specific betas

$2.19