Question

Athens Manufacturing plans to finance its expansion by raising the needed investment capital from the following sources in the indicated proportions and respective capital cost rates.

Capital Cost
Source	Proportion	Rate
Bonds	45%	12%
Preferred stock	10%	14%
Common stock	25%	8%
Retained earnings	20%	10%
	100%

Calculate the weighted average cost of capital.
Round answers to one decimal place. For example, 0.4567 = 45.7%.

Weighted Average
	Cost of Capital
Bonds	Answer
Preferred stock	Answer
Common stock	Answer
Retained earnings	Answer
	Answer

Answer 1

		A	B	C=A*B
		Weight	Cost	Weighted Cost
	Bonds	0.45	12%	5.40%
	Preferred stock	0.10	14%	1.40%
	Common Stock	0.25	8%	2.00%
	Retained Earnings	0.20	10%	2.00%
	Assumed: Tax Rate =0
	If there is tax, Cost of Bonds=12%*(1-Tax Rate)
	Weighted Average Cost of Capital (WACC)
			Cost of Capital
		Bonds	5.40%
		Preferred stock	1.40%
		Common Stock	2.00%
		Retained Earnings	2.00%
		WACC	10.8%