A company has a capital structure that includes 30% debts, 10% preferred stock, and 60% common stock. The before-tax cost of debt is 11%. The cost of preferred stock is 10.3%. The cost of common stock is 14.7%. New common stock sales cost approximately 16%. The marginal tax rate is 40% According to the above information, what is the weighted average cost of capital for this company?

A) 10.3%

B) 11%

C) 11.8%

D) None of the above

Question

Business

Romeo Acevedo

5 August, 08:30

A company has a capital structure that includes 30% debts, 10% preferred stock, and 60% common stock. The before-tax cost of debt is 11%. The cost of preferred stock is 10.3%. The cost of common stock is 14.7%. New common stock sales cost approximately 16%. The marginal tax rate is 40% According to the above information, what is the weighted average cost of capital for this company?

A) 10.3%

B) 11%

C) 11.8%

D) None of the above

+2

Answers (1)

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English · Answer 1

option (C) 11.8%

Explanation:

Debts = 30%

Preferred stock = 10%

Common stock = 60%

before-tax cost of debt = 11%

cost of preferred stock = 10.3%

cost of common stock = 14.7%

New common stock sales cost = 16%

The weighted average cost of capital for the company

marginal tax rate = 40%

= Debt * before-tax cost of debt * (1 - tax)) + (Common stock * cost of common stock) + (Preferred stock * cost of preferred stock)

= 0.30 * 0.11 * (1 - 0.40) + (0.60 * 0.147) + (0.10 * 0.103)

= 0.0198 + 0.0882 + 0.0103

= 0.1183

Or

= 0.1183 * 100% = 11.83% ≈ 11.8%

Hence.

The correct answer is option (C) 11.8%