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17 June, 09:51

Wayco Industrial Supply has a pretax cost of debt of 7.6 percent, a cost of equity of 16.8 percent, and a cost of preferred stock of 9.1 percent. The firm has 220,000 shares of common stock outstanding at a market price of $27 a share. There are 25,000 shares of preferred stock outstanding at a market price of $41 a share. The bond issue has a face value of $550,000 and a market quote of 101.2. The company's tax rate is 34 percent. What is the firm's weighted average cost of capital

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  1. 17 June, 10:02
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    14.88%

    Explanation:

    Market value of common stock outstanding = 220,000 * $27 = $5,940,000

    Market value of preferred stock = 25,000 * $41 = $1,025,000

    Market value of bond = $550,000 * 101.2% = $556,600

    Wayco's total financing market value = $5,940,000 + $1,025,000 + $556,600 = $7,521,600

    Weighted average cost of capital = [ ($5,940,000 / $7,521,600) * 16.8%] + [ ($1,025,000 / $7,521,600) * 9.1%] + [ ($556,600 / $7,521,600) * 7.6% * (1 - 34%) ] = 0.1488, or 14.88%
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