Peter's Audio Shop has a cost of debt of 7 percent, a cost of equity of 11 percent. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. The bond issue has a total face value of $500,000 and sells at 102 percent of face value. The company's tax rate is 34 percent. What is the weighted average cost of capital for Peter's Audio Shop?

9.14%

Step-by-step explanation:

The computation of the weighted average cost of capital is shown below:

= Weightage of debt * cost of debt * (1 - tax rate) + (Weightage of preferred stock) * (cost of preferred stock) + (Weightage of common stock) * (cost of common stock)

where,

Weighted of debt = Debt : total firm

The total firm includes debt, preferred stock, and the equity which equals to

= $0.51 million + $1.36 million + $2.08 million

= $3.95 million

So, Weighted of debt = ($500,000 * 102% : $3.95 million) = 0.12911392

So, the weight of preferred stock = (Preferred stock : total firm)

= 40,000 shares * $34 : $3.95 million

= 0.344303797

And, the weighted of common stock = (Common stock : total firm)

= 104,000 shares * $20 : $3.95 million

= 0.52658227

Now put these values to the above formula

So, the value would equal to

= (0.07 * $0.129 million) * (1 - 34%) + ($0.344 million * 8%) + (0.11 * $0.527 million)

= 0.5965% + 2.75% + 5.792%

= 9.14%