Preston Industries has a WACC of 11.48 percent. The capital structure consists o

Question

Preston Industries has a WACC of 11.48 percent. The capital structure consists of 60.4 percent equity and 35.4 percent debt. The aftertax cost of debt is 5.9 percent and the cost of equity is 14.60 percent. What is the cost of preferred stock?

Explanation / Answer

cost of preferred stock = 13.643% Given WACC = 11.48 percent. => after tax cost of debt (weight)+ Cost of Equity(weight) + cost of Preferred stock(weight) = 11.48% = 5.9%(0.354) + 14.6(0.604) + X(0.042) = 11.48% = 2.0886 + 8.8184 + 0.042X = 11.48% = 0.042 X = 11.48 - 10.907 = 0.573 = 0.042X = 0.573 => X = 0.573/0.042 = 13.643%

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