AVERAGE COST OF CAPITAL

17. Given the following data, compute the weighted average cost of capital (WACC).

Components of capital structure After Tax Cost

Debt $65 million 6.5%

Preferred Stock 35 million 10.5%

Common Equity 60 million 12.75%

Total 160 million

If the return on assets of the corporation is 13% on an annual basis, calculate its profitability and economic value added, EVA.

18. Provide an explanation or the rationale for the cost of capital (average or overall cost of capital, WACC) to an economic firm. That is, explain why the WACC should be used as the minimum required return.