The controller of Olaf Corporation wants to establish a minimum rate of return a

Question

The controller of Olaf Corporation wants to establish a minimum rate of return and would like to use a weighted-average cost of capital. Current data about the corporation’s financing structure are as follows:

            Debt Financing           40%

            Preferred Stock           30%

            Common Stock           20%

            Retained Earnings       10%

The cost of debt is 4 percent. The dividend rate on the preferred stock issue is 3 percent. The cost of common cost is 2 percent and the cost of retained earnings is 5 percent.

Compute the weighted-average cost of capital.

Explanation / Answer

4%*40% + 3%*30% + 2%*20% + 5%*10% = 0.016 + 0.009 + 0.004 + 0.005 = 0.034 or 3.4%

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