@mtwist113: Here's the full Q&A:
A company has the following target capital structure and costs:
Debt – Portion of Capital Structure: 30%; Interest or Dividend Rates: 10%
Common Stock – Portion of Capital Structure: 60%; Interest or Dividend Rates: 12%
Preferred Stock – Portion of Capital Structure: 10%; Interest or Dividend Rates: 10%
The company's marginal tax rate is 30%. What is the company's weighted-average cost of capital?
A – 7.84%
B – 9.30%
C – 10.30%
D – 11.2%
Answer C. The weighted-average cost of capital is the weighted average of the cost of debt and the various equity components of the firm's capital structure. The marginal tax rate is considered in determining the cost of capital for each component that has a tax effect (such as the debt interest). Since the interest is deductible, the cost of debt is 10% less 30% tax savings, or 7%. Multiply the cost of each source of capital by the proportion of capital from that source, and add the results:
Debt = 0.30 x 0.07 = 0.021
Common Stock = 0.60 x 0.12 = 0.072
Preferred Stock = 0.10 x 0.10 = 0.01
These total 10.3%
FWIW, I answered D.
Exam:I'm done 🙂 🙂 🙂
REG - 71 (2/22/14); 67 (4/3/14); 74 (8/29/15); 83 (2/29/16)!!!
BEC - 72 (5/24/14); 85 (1/3/15)!!!!
AUD - 72 (8/23/14); 76 (10/15/14)!!!
FAR - 77 (5/26/15)!!!
Started in 2013 using Kaplan and failed REG, REG, BEC, AUD. Switched to NINJA suite in Sept 2014 and passed AUD...then BEC...then FAR!
REG took 2 tries but I finally got it in too!
I'm a hard convert - Using NINJA method with NINJA video/book/notes/MCQ
Education: Check
Experience: 3 months left! I hit 4 years on May 30 🙂
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