Milton Parker has a capital structure that consists of $7 million of debt, $2 million of preferred stock, and $11

Milton Parker has a capital structure that consists of $7 million of debt, $2 million of preferred stock, and $11

 

answer:

Cost of Debt after tax r(D) = 7.4% x (1-35%) = 4.81%
Cost of Equity r(E)= 14%
Cost of Preferred r(P) = 8%
Weight of Debt w(D)= $7million/$20 million = 35%
Weight of equity w(E)= $11 million/$20 million = 55%
Weight of Preferred stock w(P) = $2million /$20 million = 10%
WACC = r(D) × (1 – t) × w(D) + r(E) × w(E) + r(P) × w(P)
WACC = 4.81% x 35% + 14% x 55% + 8% x 10% = 10.18%

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