QUESTION 4: A firm has a capital structure containing 40 percent debt, 10 percent preferred stock,...

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QUESTION 4: A firm has a capital structure containing 40 percent debt, 10 percent preferred stock, and 50 percent common stoc

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Answer 1

Answer #1

Solution :-

Cost of Equity (Ke) = Rf + Beta * ( Rm - Rf ) = 4% + 0.90*( 13.5% - 4% ) = 12.55%

Cost of Preference Stock (Kp) = Dividend / Price = $7.50 / $50.00 = 15%

Cost of Debt (kd) = Kd*(1 - tax ) = 9.50% * (1 - 0.40) = 5.70%

Weights of Equity (We) = 50%

Weight of Preference (Wp) = 10%

Weight of Debt (Wd) = 40%

WACC = (We * Ke) + (Wp * Kp) + (Wd * Kd)

= ( 0.50 * 12.55% ) + ( 0.10 * 15% ) + ( 0.40 * 5.70% )

= 10.055 %

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Answer 2

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