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Weighted average cost of capital (WACC) for Global Technology

These 2 questions need the attached Table 11-1.

Global Technology's capital structure is as follows :
Preffered stock------------15
Common Equity-----------50

The aftertax cost of debt is 6.5%; the cost of preferred stock is 10%; and the cost of common equity (in the form of retained earnings) is 13.5 percent.

Calculate Global Technology's weighted average cost of capital in a manner smiliar to table 11-1

As an alternative to the capital structure shown above for GlobalTechnology, an outside consultant has suggested the following modifications.
Preferred stock-----------5
Common equity---------35

Under this new and more debt-oriented arrangement, the after tax cost of debt is 8.8%, the cost of preferred stock is 11%, and the cost of common equity(in terms of retained earnings)is 15.6%.

Calculate Global's weighted average cost of capital in each case in a manner smilar to table 11-1.

Which capital structure should be chosen: the old one from the first problem or the consultant's?


Solution Summary

In a hand written solution, the response adequately answered the question about the WACC.