Homework Answers
After tax cost of debt = 7%-7%*25%=5.25%
Cost of equity = rf+beta*risk premium
Risk free rate = 3%
Beta = 1.75
Risk premium = 10%
Cost of equity = 3%+1.75*10%=3%+17.5% = 20.5%
Cost of preferred stock = 4/50 *100 = 8%
Calculation of WACC
| Particulars | Probability (1) | Cost (2) | WACC (3) (1*2) |
| Equity | 0.50 | 20.5% | 10.25% |
| Debt | 0.45 | 5.25% | 2.37% |
| Preferred stock | 0.05 | 8% | 0.4% |
| WACC | 13.02% |
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