Question 10 Splitter Inc. has cost of debt of 7%, cost of equity of 11%, and cos

Question

Question 10 Splitter Inc. has cost of debt of 7%, cost of equity of 11%, and cost of preferred stock of 8%. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. There are 40,000 shares of preferred stock outstanding at a market price of $34 a share. The company's bonds have face value of $500,000. The tax rate is 34%. What is the weighted average cost of capital for the company? (Note: recall that preferred stock is not tax deductible; expand your formula for WACC with the same methodology as the base with just another weighting) Max score: 1 6.14% 8.60% 9.15% 9.76% 10.22

Explanation / Answer

Weighted Average Cost of Capital = Weight of Debt * Cost of Debt + Weight of Equity * Cost of Equity + Weight of Preferred Stock* Cost of Preferred Stock

= Before Tax Cost of Debt * ( 1- Tax Rate ) * Cost of Debt + Weight of Equity * Cost of Equity + Weight of Preferred Stock* Cost of Preferred Stock

= 9.15%

Hence the correct answer is 9.15%

Value Weight(Respective Value / Total Value) Weight % Equity(104,000* $ 20) 2,080,000 0.527918782 52.79187817 Preferred Stock (40,000 * $ 34) 1,360,000 0.345177665 34.5177665 Debt 500,000 0.126903553 12.69035533 3,940,000

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