Question

Question 8 (1 point) Consider a company financed with 0.7 equity, 0.0 preferred stock, and the remaining debt subject to a corporate tax rate 0.5 If the required rate of return on the debt is 0.03, on the preferred stock is 0.10 and on the common stock is 0.09, what is the working average cost of capital for this company? Your Answer:

Answer 1

Weight of equity = 1-D/A

Weight of equity = 1-0.3

W(E)=0.7

Weight of debt = D/A

Weight of debt = 0.3

W(D)=0.3

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 3*(1-0.5)

= 1.5

WACC=after tax cost of debt*W(D)+cost of equity*W(E)

WACC=1.5*0.3+9*0.7

WACC =6.75%