Based on the information below, calculate the weighted average cost of capital.

Question

Based on the information below, calculate the weighted average cost of capital.

Great Corporation has the following capital situation.

Debt: One thousand bonds were issued five years ago at a coupon rate of 11%. They had 20-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 37%
Preferred stock: Two thousand shares of preferred are outstanding, each of which pays an annual dividend of $7.50. They originally sold to yield 15% of their $50 face value. They're now selling to yield 11%.
Equity: Great Corp has 108,000 shares of common stock outstanding, currently selling at $18.48 per share. Use the risk premium approach and assume a 3% risk premium

Explanation / Answer

In order to calculate a weighted average cost of capital there are a few pieces of information that we need to know:

TheWd= The proportion of the financing taken on by debt (amount of capital taken from loans/initial investment)
The Wpfd= The proportion of the financing taken provided by preferred stock (amount of capital taken from preferred stock/initial investment)

The We= The proportion of the financing provided by equity (amount of capital raised by new equity/initial investment)

The after tax Kd= The cost of debt x ( 1- tax rate) or the interest rate that the bank requires

The Kpfd= dividend/share price

The Ke= R(r)+ Beta (Market Risk Premium)

The initial investment

The tax rate

We are now able to calculate the WACC which =


Wd(Kd)(1-t)+(Wpfd)(Kpfd) +(We)(Ke)

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