1. 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.

a. rp, rd, re, rs (choose one) is the symbol that represents the cost of raising capital through retained earnings in the weighted average cost of capital (WACC) equation.

b. Avery Co. has $1.4 million of debt, $1 million of preferred stock, and $3.3 million of common equity. What would be its weight on preferred stock?

choose one

0.25

0.58

0.16

0.18

2. a. choose one The (after tax cost or before tax cost)

is the interest rate that a firm pays on any new debt financing.

b. Three Waters Company (TWC) can borrow funds at an interest rate of 7.30% for a period of five years. Its marginal federal-plus-state tax rate is 25%. TWCs after-tax cost of debt is _______ (rounded to two decimal places).

c. At the present time, Three Waters Company (TWC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,555.38 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If TWC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.)

4.11%

4.93%

3.70%

4.73%