Purchase Solution

WACC

Not what you're looking for?

Ask Custom Question

A company's pre-tax cost of debt is 10%. Their preferred stock pays a $10 dividend and sells for $100. Common stock is selling for $50 and the next expected dividend will be $3. The dividend growth rate on common stock is 8%. The company's tax rate is 30% and their capital structure is:

Debt: 50%
P.S.: 10%
C.S.: 40%

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

Purchase this Solution
Solution Summary

The response follows the standard approach to calculate the WACC of a company. The approach is pretty standard and the same approach could be used to solve similar questions in the future. The steps are easy to understand and interpret. Overall a concise response to the question.

Solution Preview

Cost of Capital for Debt = Pre-tax cost less the tax benefit
Let Rd = (10 %)*(1-Tax Rate) = (10 %)(0.7) = 7 %. Therefore the cost of debt equals 7 %

Cost of capital for preferred = dividend/price (in other words, the ...

Purchase this Solution
Free BrainMass Quizzes
Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

View More Free Quizzes
Related BrainMass Solutions

  • Multiple choice

    The project's IRR increasess as the WACC declines. The project's NPV increases as the WACC declines.

  • MCQ on capital budgeting

    MIRR is calculated by investing the intermediate cash flows at project's WACC. Therefore, MIRR is affected by WACC. Payback period does not use any discount rate; hence WACC has no role to play in the calculation of WACC.

  • WACC Explanation and analysis

    433532 WACC Explanation and analysis See attached file. Provided to you are 2 rounds of separate WACC analysis. Please provide an explanation of the WACC results and compare the rounds to each other. Are the WACC results a positive outcome?

  • What is meant by Weighted Average Cost of Capital (WACC)?

    209965 Weighted Average Cost of Capital (WACC) Definition a. What is meant by Weighted Average Cost of Capital (WACC)? b. What are the components of WACC? c. Why is WACC a more appropriate discount rate when doing capital budgeting? d.

  • Last month, Lloyd's Systems analyzed the project whose cash

    A financial calculator would be the simplest: NPV = CF0+CF1/(1+WACC)^1+CF2/(1+WACC)^2+CF3/(1+WACC)^3 Old WACC = 10%, NPV = -1000+410/(1+10%)^1+410/(1+10%)^2+410/(1+10%)^3 = $19.61 WACC = 11.25% New NPV = -1000+410/(1+11.25%)^1+410/(1+11.25%

  • Weighted Average Cost of Capital

    Situation 1 - Equity 50%, Preferred Stock 25% & Debt 25% WACC = 50%*14 + 25%*6 + 25%*8*(1-0.35) WACC = 7% + 1.5% + 1.3% WACC = 9.8% Situation 2 - Equity 60%, Preferred Stock 20% & Debt 20% WACC = 60%*14 + 20%*6 + 20%*8*(1-0.35) WACC = 8.4%

  • WACC

    129892 WACC The general rule for using the weighted average cost of capital in capital budgeting decisions is accept all projects with rates of return greater or equal to the WACC, less than the WACC, equal to or less than the WACC or positive rates of

  • cost of common stock that you would use in the WACC formula

    WACC Formula Describe how you would calculate the cost of common stock that you would use in the WACC formula? How are the weights derived that are used in the WACC formula?

  • WACC from the asset structure for McCabe Interests

    WACC = 14.25% The solution estimates WACC from the asset structure for McCabe Interests.

  • Weighted Average Cost of Capital (WACC)

    WACC = 10.60% The solution computes wacc with the given information.

View More Related Solutions