Westshore Diagnostics has 28,000 shares of common stock outstanding and the price is per share of $71 . The rate of return on their stock is 13.40 percent. Westshore Diagnostics has 6,900 shares of 7.00 percent preferred stock outstanding at a price of $91.00 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $380,000 and currently sells for 107 percent of face. The yield to maturity on the debt is 7.84 percent. What is the firm's weighted average cost of capital if the tax rate is 39 percent?

Answer :

Weighted average capital cost = 11.05%

Explanation :

As per the data given in the question,

(a)                                            (b)                                 (c = a × b)

Amount per share Bond price or share price Market value Weight     (c/Total)

Debt $380,000               107%                        $406,600              13.45%

Preferred stock 6,900     $91                           $627,900              20.77%

Common stock  28,000   $71                          $1,988,000            65.77%

Total                                                                   $3,022,500

Now the WACC is

Particulars Cost          Weight                     Weighted cost

Debt         4.78%             13.45%                        0.64%

Preferred stock 7.69%    20.77%                       1.60%

Common stock 13.40%   65.77%                       8.81%

WACC                                                                 11.05%

Working Notes:

Cost of debt = 7.84% × (1 - 39%)

= 4.78%

Cost of preferred stock = Dividend ÷ current price

=(7% × 100) ÷ 91

= 0.07692

= 7.69%

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