Question

# I am doing an assignment that is asking for weighted averages. I have been given the following information:

\$50 million in bonds which pay a 5.5% coupon; \$20 million in preferred stock with a par value of \$50 per share and an annual dividend of \$2.75 per share; and common stock with a book value of \$25 million. The cost of capital associated with common stock is 12% and the marginal tax rate for the firm is 30%.

In trying to complete the WACC calculations, I have come up with the following:

WACC= (E/ V x r E) + (D/V x rD x (1-t))

Where: E = market value of Equity (Preferred stock + Common Stock) 45,000,000

D= market value of Debt (bonds) 50,000,000

V = total value of the firm (E + D) 95,000,000

E/V – percentage of capital that is equity (45,000,000 / 95,000,000) .47368

D/V – percentage of capital that is debt (50,000,000 / 95,000,000) .52631

t = corporate tax rate 30%

My problem comes in that I cannot figure out the cost of equity and cost of debt for this problem. I have been trying to work with the following equations:

r e = the cost of equity (V E / V E + VD )

r d = the cost of debt (V D / V E + V D )

But I have come up with three entirely different answers for the problems. can you give me some idea on how I should be filling this in?

Thank you,

Julie Evans

Managerial Accounting