Given the following information, calculate the weighted average cost for the Ban

Question

Given the following information, calculate the weighted average cost for the Ban Corp.  
Percent of capital structure:
Preferred stock                                                      10%
Common equity                                                     70%
Debt                                                                      20%

Additional information:
Corporate tax rate                                                  34%
Dividend, preferred                                                $8.00
Dividend, expected common                                  $4.00
Price, preferred                                                      $80.00
Growth rate                                                            5%
Bond yield                                                             7%
Price, common                                                         $80.00

Explanation / Answer

WACC = Percentage of Equity x Cost of Equity + Percentage of Preference x Cost of Preference + Percentage of Debt x Cost of Debt x (1-Corporate Tax)

Cost of Common Equity = 4 / 80 x 100 = 5%

Cost of Preferred Stock = 8 / 80 x 100 = 10%

Cost of Debt = 7%

Cost Weight WACC Preferred Stock 10.00% 10% 5.42% Common Equity 5.00% 70% Debt 7.00% 20% Tax Rate 34.00%

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