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Global Technology’s capital structure is as follows: Debt 15 % Preferred stock 50 Common equity 35 The aftertax cost of debt is 6.00 percent; the cost of preferred stock is 10.00 percent; and the cost of common equity (in the form of retained earnings) is 13.00 percent. Calculate the Global Technology’s weighted cost of each source of capital and the weighted average cost of capital.

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Answer:

1.    0.9% ; 5% ; 4.55%

2.   10.45%

Explanation:

Cost of equity = 13%

After tax cost of debt= 6%

Cost of preferred stock = 10%

Weight of debt = 15%

Weight of preferred stock = 50%

Weight of equity = 35%

Therefore;

1

•After tax weighted cost of debt = weight of debt × after tax cost of debt

= 0.15 × 0.06

= 0.009

= 0.9%

•Weighted preferred stock cost = Weight of preferred stock × cost of preferred stock

= 0.50 × 0.10

= 0.05

= 5%

•Weighted common equity stock cost =  weight of equity × cost of equity

= 0.35 × 0.13

= 0.0455

= 4.55%

2.

• Weighted average cost of the firm

= After tax weighted cost of debt + Weighted preferred stock cost + Weighted common equity stock cost

= 0.9% + 5% + 4.55%

= 10.45%

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