Question

Consider a company with a capital structure consisting of 45% debt and 19% preferred stock, with the remainder in common stock. The company's debt is represented by one bond issue, which currently has a yield to maturity of 7.11%. The preferred shares each have a par value of $1,000 and offer a dividend rate of 4.3%. The market price per share of the preferred stock is currently $903.37. The firm's cost of common equity has been estimated to be 13.17% using the CAPM. The company's tax rate is 28%. What is the company's weighted average cost of capital (WACC)?

Answer 1

First Calculate cost of preferred stock

Divided= 4.3% of 1000 = $43

Cost of preferred stock= dividend/ preferred stock price =43/903.37 =4.76%

WACC = Cost of equity* % of equity + cost of debt* % of debt*(1-tax rate)+ cost pf preferred sh* % of preferred share

=13.17%*36%+ 7.11%*45% + 4.76%*19%

=8.845%

Hence the WACC is 8.5%