A firm has a bank loan with a $10\%$ interest rate. The firm also has in issue $8\%$ preference shares trading at nominal value and has estimated that its cost of ordinary shares is $18\%.$ The firm has a $30\%$ tax rate.

What is the weighted average cost of capital if the firm uses a capital structure comprising $50\%$ debt and an even split between preference and ordinary shares?

Question $4$Answer

a$.$

$10\%$

b$.$

$9\mathrm{.}40\%$

c$.$

$11\mathrm{.}50\%$

d$.$

$8\mathrm{.}05\%$The market values of a firm$$s capital are given below:

Total debt: $$7$ million

Outstanding preferred stock: $$2$ million

Outstanding common stock: $$12$ million

Its before$-$tax cost of debt is $8\%,$ cost of common equity is $12\%$ and cost of preferred stock is $9\%.$ Assuming company$$s marginal tax rate is $35\%,$ what is the weighted average cost of capital $($WACC$)$ for the firm?

Question $5$Answer

a$.$

$10\%$

b$.$

$9\mathrm{.}5\%$

c$.$

$10\mathrm{.}40\%$

d$.$

$29.\%$