\"A company you are researching has common stock with a beta of 1.20. Currently,

Question

"A company you are researching has common stock with a beta of 1.20. Currently, Treasury bills yield 4%, and the market portfolio offers an expected return of 13%. The company finances 20% of its assets with debt that has a yield to maturity of 6%. The firm also uses preferred stock to finance 30% of its assets. The preferred stock has a current price of $10 per share and pays a level $1.00 dividend. The firm is in the 35% tax bracket. What is the weighted average cost of capital?" 11.91% 10.42% 15.97% 11.18% 19.40% "A company you are researching has common stock with a beta of 1.20. Currently, Treasury bills yield 4%, and the market portfolio offers an expected return of 13%. The company finances 20% of its assets with debt that has a yield to maturity of 6%. The firm also uses preferred stock to finance 30% of its assets. The preferred stock has a current price of $10 per share and pays a level $1.00 dividend. The firm is in the 35% tax bracket. What is the weighted average cost of capital?" 11.91% 10.42% 15.97% 11.18% 19.40% 11.91% 10.42% 15.97% 11.18% 19.40%

Explanation / Answer

preferred stock = 30%

debt = 20%

rest 50% common stock

also cost of common stock = 0.04 + 1.20*(0.13-0.04) = 0.148

cost of preferred stock = dividends/price = 1/10 =0.1

and cost of tax deducted debt = 0.06*(1-0.35) = 0.039

wacc = 0.148*0.50 + 0.1*30 + 0.2*0.039 = 0.1118 = 11.18 %

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