Question

peters audio has a yeild to maturity on its debt of 7.8%, cost of equity of 12.4%, and a cost preferred stock of 8%. the weight equity is 47.09%, of debt is 21.97%, and of preferred stockis 30.94%. if the tax rate is 34%, what is the weighted average cost of capital? will the firm accept the expansion project that has an IRR of 10%?

A. 10.03 % yes

B. 10.03 % no

C. 9.75 % yes

D. 9.45 % yes

E. 9.45% no

Answer 1

Weighted average cost of capital = Weight of equity*cost of equity + weight of preferred stock*cost of preferred stock + weight of debt*after tax cost of debt

Weighted average cost of capital = 0.4709*0.124 + 0.3094*0.08 + 0.2197*0.078*(1 - 0.34)

Weighted average cost of capital = 0.05839 + 0.02475 + 0.01131

Weighted average cost of capital = 0.0945 or 9.45%

D. 9.45 % yes

Projects having IRR greater than cost of capital should be accepted