B D E F 1 WACC and optimal capital budget 2 3 Cost of debt, rd 4 Tax rate, T 5 Preferred dividend 6 Preferred stock price, Pp 7 Common stock price, Po 8 Expected common dividend, D. 9 Common stock constant growth rate, gn 10 % common stock in capital structure 11 % debt in capital structure 12% preferred stock in capital structure 13 Cost of capital components 14 & WACC calculation: 15 After-tax cost of debt, ra(1 T) 16 Cost of preferred stock, rp 17 Cost of common stock, rs 18 19 20 Project acceptance analysis: 11.00% 40.00% $3.00 $52.00 $36.00 $3.50 7.00% 75.00% 15.00% 10.00% Weighted Cost Weights After-tax Cost 15.00% 10.00% 75.00% WACC = Accept Project? Y/N 21 22 23 24 25 26 27 28 Projects 1 2 3 4 Cost $2,000 $3,000 $5,000 $2,000 Rate of Return 16.00% 15.00% 13.75% 12.50% Formulas