What is the weighted average cost of capital Great Corporation has the following

Question

What is the weighted average cost of capital

Great Corporation has the following capital situation. Debt: One thousand bonds were issued five years ago at a coupon rate of 10%. They had 25-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 40% Preferred stock: Two thousand shares of preferred are outstanding, each of which pays an annual dividend of $7.50. They originally sold to yield 15% of their $50 face value. They're now selling to yield 10%. Equity: Great Corp has 120,000 shares of common stock outstanding, currently selling at $14.48 per share. The risk free rate is 3%, market rate of return is 10% and the Beta is 1.2.

Explanation / Answer

Re = 3 +1.2*(10-3) = 11.4 %

Rd = 9%

Rp = 10%

Debt = 1000*1000 = $1000,0000

Preferred stock = 2000*50 = $ 100,000

Equity = 120,000*14.48 = 1737,600

We = 0.61

Wd = 0.352

Wp = 0.04

WACC = 9.255 %

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