Directions: You MUST show ALL of your work to receive credit on the problems. Th

Question

Directions: You MUST show ALL of your work to receive credit on the problems. There will be significant point reductions if you do not show your work. All calculations should be completed to at least 2 decimal places.

Compute the weighted-average cost of capital for a firm with the following sources of funds and corresponding required rates of return: $5 million common stock at 16%, $500,000 preferred stock at 10%, and $3 million debt at 9%. All amounts are listed at market values and the firm's tax rate is 35%.

Explanation / Answer

Cost of debt after tax=9%*(1-0.35)=5.85%

Total funds=$5,000,000+$500,000+$3,000,000=$8,500,000

weighted-average cost of capital for a firm:

=16%*$5,000,000/$8,500,000+10%*$500,000/$8,500,000+5.85%*$3,000,000/$8,500,000

=9.41%+0.59%+2.06%=12.06%

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