Aa Aa 1. The basic WACC equation The calculation of WACC involves calculating th

Question

Aa Aa 1. The basic WACC equation The calculation of WACC involves calculating the weighted average of the required rates of return on debt and equity, where the weights equal the percentage of each type of financing in the firm's overall capital structure. rpis the symbol that represents the cost of preferred stock in the weighted average cost of capital (WACC) equation Mitchell Co. has $3.9 million of debt, $2 million of preferred stock, and $1.8 million of common equity. What would be its weight on preferred stock? O 0.26 O 0.29 O 0.21 O 0.23

Explanation / Answer

weight of preferred stock = 2/(2 + 3.9 + 1.8) = 0.26

rd

after tax cost = 12.5*0.7% = 8.75%

PV = -1229.24, FV = 1000, N =5 , PMT = 100

use rate funtion in Excel and multiply by 0.7

cost of debt = 3.32%

Equity

Equity

cost = 13/139.84 = 9.30%

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