Question

Global Technology’s capital structure is as follows:

Debt 35 %
Preferred stock 15
Common equity 50

The aftertax cost of debt is 8.50 percent; the cost of preferred stock is 12.50 percent; and the cost of common equity (in the form of retained earnings) is 15.50 percent. Calculate the Global Technology’s weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

Answer 1

(a) 1.275% ; 6.25% ; 5.425%

(b) 12.95%

Step-by-step explanation:

Given that,

After tax Cost of debt = 8.5%

Cost of preferred stock = 12.50%

Cost of Equity = 15.50%

Weight of debt = 15%

Weight of preferred stock = 50%

Weight of equity = 35%

After tax Weighted debt cost = Weight of debt × After tax Cost of debt

= 0.15 × 8.50%

= 1.275%

Weighted preferred stock cost = Weight of preferred stock × Cost of preferred stock

= 0.50 × 12.50%

= 6.25%

Weighted common equity stock cost = Weight of equity × Cost of Equity

= 0.35 × 15.50%

= 5.425%

Weight average cost of the firm:

= After tax Weighted debt cost + Weighted preferred stock cost + Weighted common equity stock cost

= 1.275% + 6.25% + 5.425%

= 12.95%

Note: The values of Debt, preferred stock and common equity are rearranged.