Question

Global Technology’s capital structure is as follows:

Debt	50	%
Preferred stock	35
Common equity	15

The aftertax cost of debt is 9.00 percent; the cost of preferred stock is 12.50 percent; and the cost of common equity (in the form of retained earnings) is 16.00 percent.

  
Calculate the Global Technology’s weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
  

Answer 1

The weighted cost of each source of capital :

	Weight	Cost of Capital	Weight * Cost of Capital
Debt	50	9%	4.50	%
Preferred stock	35	12.50%	4.38	%
Common equity	15	16%	2.40	%

Weighted average cost of capital = (Cost of Debt * Weight of Debt) + (Cost of Equity * Weight of Equity)+ (Cost of Preferred Stock * Weight of Preferred Stock )

= 4.50% +4.38% +2.40%

= 11.28%