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8 March, 08:30

If a company has a capital structure of $5,000,000 common stock with a cost of 17%, $2,000,000 bonds at 4%, $1,000,000 of short term debt with a cost of 7%, and $2,000,000 preferred stock with a cost of 3%, what is the weighted average cost of Capital?

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  1. 8 March, 12:28
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    Weighted Average Cost of Capital; formula is as follows;

    WACC = wE*re + wP*wp + wD*rd (1-tax)

    where w = weight of ...

    r = cost of ...

    E = common equity

    P = preferred stock

    D = Debt

    Find the weights of each source of capital;

    WACC = (0.50*0.17) + (0.20*0.03) + [0.20*0.04 (1-0.40) ] + [0.10*0.07 (1-0.40) ]

    WACC = 0.085 + 0.006 + 0.0048 + 0.0042

    WACC = 0.1 or 10%
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