How to:

1.Find the relative proportions of debt, preferred stock, common stock and retained earnings.

2.Find the after tax cost of debt

3.Multiply the proportions or weighting from step one times the after tax cost of debt and expected rate of return on preferred or common stock and retained earnings.

Add to find the weighted average cost of capital

Weighted Average Cost of Capital Capital Asset Pricing Model Review Problem Expected rate of return = risk free rate (market rate - risk free rate) * beta Steps in the calculation: If the risk free rate is 5% A company's beta is 1.5 1. Find the relative proportions of debt, preferred stock, common stock and retained earnings. Market rate is 12 % 2. Find the after tax cost of debt 3. Multiply the proportions or weighting from step one times the after tax cost of debt and expected Expected rate of return = rate of return on preferred or common stock and retained earnings. 4. Add to find the weighted average cost of capital. A company has this capital structure: Long Term Debt $250 002 Preferred Stock $ 250,000 Common Stock $1,000,000 Total Capital $2,000,000 Proportions: Long term debt Preferred Stock Common Stock Interest rate on Debt Expected rate of return - Prof 12% Expected rate of return - Common 15% Tax Rate 30% After tax cost of debt: Weighted average cost of capital