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An entity has a tax rate of 35% and a capital structure consisting of 40% noncurrent debt, 20% preferred stock, and 40% common equity. The before-tax cost of capital for these components are 8%, 13%, and 17%, respectively. What is the entity’s weighted-average cost of capital?

Respuesta :

Answer:

11.48%

Explanation:

The computation of the entity’s weighted-average cost of capital is shown below:

= Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of  common stock) × (cost of common stock)

= (0.4 × 8%) × ( 1 - 35%) +  (0.20 × 13%) +  (0.40 × 17%)

= 2.08% + 2.6% + 6.8%

= 11.48%

Simply we multiplied the weighatge with each capital structure  

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