The company's after-tax cost of debt is 14% and the cost of equity is 16%. Given that the company's weighted average cost of capital is 14.5%, its cost of preferred equity is closest to:

a) 4.5%

b) 3.5%

c) 4.0%

Question

Sanaa Larson

Business

12 September, 04:52

The company's after-tax cost of debt is 14% and the cost of equity is 16%. Given that the company's weighted average cost of capital is 14.5%, its cost of preferred equity is closest to:

a) 4.5%

b) 3.5%

c) 4.0%

+5

Answers (1)

Know the Answer?

Jasmin · Answer 1

c) 4.0%

Explanation:

The formula to compute WACC is shown below:

Weighted average cost of capital = Weightage of debt * cost of debt + (Weightage of preferred equity) * (cost of preferred equity) + (Weightage of common stock) * (cost of common stock)

14.5% = (0.45 * 14%) + (0.05 * cost of preferred equity) + (0.50 * 16%)

14.5% = 6.3% + (0.05 * cost of preferred equity) + 8%

After solving this, the cost of preferred equity would be 4%

The company's after-tax cost of debt is 14% and the cost of equity is 16%. Given that the company's weighted average cost of capital is 14.5%, its cost of preferred equity is closest to:a) 4.5%b) 3.5%c) 4.0%

The company's after-tax cost of debt is 14% and the cost of equity is 16%. Given that the company's weighted average cost of capital is 14.5%, its cost of preferred equity is closest to:

a) 4.5%

b) 3.5%

c) 4.0%