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:
Source of capital / Taget Market Proportions / After-Tax Cost
Long-term Debt/ 40% / 6%
Preferred Stock / 10% / 11
Common Stock Equity / 50 / 15
The weighted average cost of capital is__________.

Answer 1

Answer:

11%

Explanation:

The formula to compute WACC is shown below:

= Weightage of debt ×  after cost of debt + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of  common stock) × (cost of common stock)

= (0.40 × 6%)  +  (0.10 × 11%) +  (0.50 × 15%)

= 2.4% + 1.1% + 7.5%

= 11%

Simply we multiply the weightage with its cost so that the correct cost of capital can come based on weighted average