Question

QUESTION 43 Based on the information below: % of Total After tax cost of Capital 8% Source of Capital Bonds Preferred Stock Retained earnings Total Amount of Funds $ 198,565.00 265,000.00 985,621.00 $ 1,449,186.00 12% $ 1 196 100.00% What is the firm's cost of capital? C10.77% C 8.56% C 7.23% C 6.85%

Answer 1

Weight of debt in the capital structure= $198,565/ $1,449,186

= 0.1370*100

= 13.70%

Weight of preferred stock in the capital structure= $265,000/ $1,449,186

= 0.1829*100

= 18.29%

Weight of retained earnings in the capital structure= $985,621/ $1,449,186

= 0.6801*100

= 68.01%

The cost of capital is calculated using the weighted average cost of capital.

The weighted average cost of capital is calculated using the below formula:

WACC=Wd*Kd(1-t)+Wps*Kps+We*Ke

where:

Wd= Percentage of debt in the capital structure.

Kd= The before tax cost of debt

Wps= Percentage of preferred stock in the capital structure

Kps=Cost of preferred stock

We=Percentage of equity in the capital structure

Ke= The cost of common equity.

T= Tax rate

WACC= 0.1370*8% + 0.1829*12% + 0.6801*11%

= 1.0960% + 2.1948% + 7.4811%

= 10.7719% 10.77%.

Hence, the answer is option a.