Delta corporation has common stock of $50 million, preferred stock of $20 million, and total liabilities...
Homework Answers
Weighted average cost of capital (WACC) of firm can be computed with following equation:
where,
w = weight
ke = cost of equity
kp = cost of preferred stock
kd = Post tax cost of debt.
Common stock = $50 million
Preferred stock = $20 million
Debt(liabilities) = $30 million
Thus,
Total Capital = 50+20+30 = $100 million
we = 50/100 = 0.5
wp = 20/100 = 0.2
wd = 30/100 = 0.3
Cost of equity (ke) = 12% = 0.12
Cost of preferred stock (kp) = 9% = 0.09
Cost of Debt = 16%
Tax rate = 40%
Post tax cost of debt (kd) = 16%(1-40%) = 9.6% = 0.096
Putting the values
Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.
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