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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?

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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.

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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 ...

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