Question

Western Electric has 35,000 shares of common stock outstanding at a price per share of $85 and a rate of return of 12.70 percent. The firm has 7,600 shares of 8.40 percent preferred stock outstanding at a price of $98.00 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $422,000 and currently sells for 114 percent of face. The yield to maturity on the debt is 8.26 percent. What is the firm's weighted average cost of capital if the tax rate is 40 percent

Answer 1

Answer:

10.83 %

Explanation:

Weighted average cost of capital = Cost of Equity x Weight of Equity + Cost of Debt x Weight of Debt + Cost of Preferred Stock x Weight of Preferred Stock

therefore,

Weighted average cost of capital = 12.70 % x 70.82 % + 4.956 % x 17.73 % + 8.40 % x 11.45 %

                                                        = 10.83 %

Remember to use after tax cost of debt.