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1. The basic WACC equation The calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and

1. The basic WACC equation

The calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and common equity, where the weights equal the percentage of each type of financing in the firms overall capital structure.

_____ is the symbol that represents the cost of raising capital through retained earnings in the weighted average cost of capital (WACC) equation.

Bryant Co. has $1.1 million of debt, $1 million of preferred stock, and $1.8 million of common equity. What would be its weight on debt?

0.21

0.23

0.26

0.28

3. The cost of preferred stock

Preferred stock is a hybrid security because it has some characteristics typical of debt and others typical of equity. The following table lists various characteristics of preferred stock. Determine which of these characteristics is consistent with debt and which is consistent with equity.

Characteristics

Debt

Equity

Dividends are fixed.

Usually has no specified maturity date.

Consider the case of Turnbull Enterprises:

At the present time, Turnbull Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Turnbull has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $11 per share. If the investors pay $97.95 per share for their investment, then Turnbulls cost of preferred stock (rounded to four decimal places) will be ____.

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