What is the Weighted Average Cost of Capital (WACC) for a firm where debt is 40% of the firm, preferred stock is 10% of the firm, common stock is 50% of the firm, after tax cost of debt is 8%, cost of preferred stock is 12%, and the cost of common stock is 18%?
prefered stock
To calculate the Weighted Average Cost of Capital (WACC) for a firm, you need to determine the weighted average of the individual costs of capital for each source of financing (debt, preferred stock, and common stock) based on their proportion in the firm's capital structure.
Here's how you can calculate the WACC:
Step 1: Determine the weight of each source of financing:
- Debt weight = 40%
- Preferred stock weight = 10%
- Common stock weight = 50%
Step 2: Determine the cost of each source of financing:
- After-tax cost of debt = 8%
- Cost of preferred stock = 12%
- Cost of common stock = 18%
Step 3: Calculate the weighted average cost of capital (WACC) using the following formula:
WACC = (Weight of debt * Cost of debt) + (Weight of preferred stock * Cost of preferred stock) + (Weight of common stock * Cost of common stock)
Substituting the values from Step 1 and Step 2 into the formula, we get:
WACC = (0.40 * 0.08) + (0.10 * 0.12) + (0.50 * 0.18)
WACC = 0.032 + 0.012 + 0.090
WACC = 0.134 or 13.4%
Therefore, the Weighted Average Cost of Capital (WACC) for the firm is 13.4%.