Question

A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions: Long term debt has a 40% target weight and costs 10% (before tax); the tax rate is 40%. Common Equity weights 50% and it costs 15% whereas preferred equity is 10% and costs 11%. The weighted average cost of capital is Group of answer choices

10.7 percent

11 percent

15 percent

9 percent

6 percent

Please show work! Thank you!

Answer 1

Id = .40 ka= 10% 40% Taxe = T- • 50 ke = 15% wop n. 10 kp = = 11°/- WACC wdkd C1 - Tax) it wop kp & weke = -40 X 10 X (1-.40) + 10X1 +.50 X 15 = 2.40 + logo + 7.50 41% Answer,