Weighted Cost of Capital Question?

Question

I have a company that has the capital structure given below. If their tax rate is 30 percent, what is its weighted cost of capital?

Note: The first number is the book value. The second number is the market value. The percentage is the before-tax cost.

Bonds/Investmts
$1,000 $1,000 8%

Preferred stock
400 300 9%

Common stock
600 1,700 14%

Answer 1

Here, do the work to calculate the WACC. Lot's of useful formulas and info on this website:
http://pages.stern.nyu.edu/~adamodar/


I'm not clear on your last set of numbers.
Common Stock 6001,70014%
Do you mean:
Common Stock (book value) 600
Common Stock (market value) 700
Before tax cost of Common Stock (14%)

You should double check my work, also based on the questions I sent you. But, I come up with WACC= 9.05%, using the following numbers:
Ke = Cost of Equity = 0.14
Pretax Cost of Debt = 0.08
Tax Rate = 0.3
Kd = After Tax Cost of Debt = 0.056
Kps = Cost of Preferred Stock = 0.09
E = Market Value of Equity = 700
D = Market Value of Debt = 1000
PS = Market Value of Preferred Stock = 300
E+D+PS = Market Value of Firm = 2000
E/(E+D+PS) = Market Value Proportion of Equity = 0.35
D/(E+D+PS) = Market Value Proportion of Debt = 0.5
PS/(E+D+PS) = Market Value Proportion of Preferred Stock = 0.15

WACC= Ke(E/[E+D+PS]) + Kd(D/[E+D+PS]) + Kps(PS/[E+D+PS])

Answer 2

WACC = W(e)*K(e) + W(d)*K(d) + W(p)*K(p)

W(e) = Market weighting of equity
W(d) = Market weighting of debt
W(p) = Market weighting of proferred shares

W(e) = 1700/(1000+300+1700) = 56.7%
W(d) = 1000/(1000+300+1700) = 33.3%
W(p) = 300/(1000+300+1700) = 10.0%
W(e) + W(d) + W(p) = 100%

K(e) = 14% (given)
K(p) = 9% (given)
K(d) = pretax * (100% - tax rate) = 8% * (100%-30%) = 5.6%
You take out a 30% of the pre-tax debt cost because you (the stakeholder) get a tax deduction for using debt (whereas you don't for equity or preferred dividends).

W(e)*K(e) + W(d)*K(d) + W(p)*K(p) = 10.7%