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Weighted average cost of capital (WACC)

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Can you please explain in detail how to do this problem so that I may learn how to do it? Also, is there a function in Excel that calculated this?

. Johnson Industries finances its projects with 40 percent debt, 10 percent preferred stock, and 50 percent common stock.

? The company can issue bonds at a yield to maturity of 8.4 percent.
? The cost of preferred stock is 9 percent.
? The company's common stock currently sells for $30 a share.
? The company's dividend is currently $2.00 a share (D0 = $2.00), and is expected to grow at a constant rate of 6 percent per year.
? Assume that the flotation cost on debt and preferred stock is zero, and no new stock will be issued.
? The company's tax rate is 30 percent.

What is the company's weighted average cost of capital (WACC)?

a. 8.33%
b. 9.32%
c. 9.79%
d. 9.99%
e. 13.15%

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Solution Summary

The solution explains the calculation of the component cost of capital and the weighted average cost of capital.

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The formual for calculating the WACC is
WACC =Wd(Kd)(1-t)+(Wpfd)(Kpfd) +(We)(Ke)
where
Wd is the weight of debt in the total capital
Kd is the before tax cost of debt
Wpfd is the weight of preferred stock in the total capital
Kpfd is the cost of preferred ...

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