Question

Wayco Industrial Supply has a pretax cost of debt of 8.3 percent, a cost of equity of 14.7 percent, and a cost of preferred stock of 8.9 percent. The firm has 165,000 shares of common stock outstanding at a market price of $33 a share. There are 15,000 shares of preferred stock outstanding at a market price of $43 a share. The bond issue has a face value of $750,000 and a market quote of 101. The company's tax rate is 21 percent. What is the weighted average cost of capital?

Multiple Choice

12.60 percent

10.84 percent

13.25 percent

14.32 percent

12.18 percent

Answer 1

Answer:

correct answer is 13.25 percent.

Explanation:

Debt = (750,000*101%)

        = $757,500  

cost = 8.3*(1-tax rate)

         = 8.3*(1-0.21)

         = 6.557%

Equity = (165000*33)

           = $5,445,000

cost = 14.7%

Preferred stock = (15000*43)

                           =$645000

cost = 8.9%

Total = $645000 + $5,445,000 + $757,500

         = $6847500

weighted average cost of capital = costs*Respective weights

= (757500/6847500*6.557) + (5,445,000/6847500*14.7) +(645000/6847500*8.9)

= 13.25%

Therefore, The weighted average cost of capital is 13.25%