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# Question of the Week - Corporate Finance (WACC)

IllinoisPosts: 68 Sr Associate
edited July 2014
The market values of a firm’s capital are given below:
Total debt: \$7 million
Outstanding preferred stock: \$2 million
Outstanding common stock: \$12 million

Its before-tax cost of debt is 8%, cost of common equity is 12% and cost of preferred stock is 9%. Assuming company’s marginal tax rate is 35%, what is the weighted average cost of capital (WACC) for the firm?

## Question of the Week - Corporate Finance (WACC) 29 votes

10.4%
13%
10%
6%
9.5%
79%

• IllinoisPosts: 68 Sr Associate

Weight of debt in the firm’s capital structure = 7/ (7 + 2 + 12) = 33.3%

Weight of preferred stock in the firm’s capital structure = 2/ (7 + 2 + 12) = 9.5%

Weight of common stock in the firm’s capital structure = 12/ (7 + 2 + 12) = 57.1%

After-tax cost of debt = 8*(1-0.35) = 5.2%

WACC = (weight of debt*cost of debt) (weight of preferred stock*cost of preferred stock) (weight of equity*cost of equity) = 0.333*0.052 + 0.095*0.09 + 0.571*0.12 = 9.5%

• St. Louis, MOPosts: 72 Sr Associate
9.5%
Woo! I got it right!