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Weighted Average Cost of Capital

Consider the data on the following data, calculate the individual costs for each security and the weighted average cost of capital. Then comment on your findings.

Percent of capital structure:

Debt 30%

Preferred stock 15

Common equity 55

Additional information:

Bond coupon rate 13%

Bond yield to maturity 11%

Dividend, expected common $3.00

Dividend, preferred $10.00

Price, common $50.00

Price, preferred $98.00

Flotation cost, preferred $5.50

Growth rate 8%

Corporate tax rate 30%

Solution Preview

Cost of debt is present yield to maturity (YTM) since that is the interest rate that the investors are demanding. For a firm, since interest is tax deductible, cost of debt is the after tax cost.
YTM =11%
Tax rate=30%
After cost of debt=11% *(1-0.3)=7.7%

Since the preferred stock is a perpetuity, its ...

Solution Summary

The solution explains the calculation of individual cost of the capital of the various components and then the weighted average cost of capital (WACC)