Answer (D) is correct . The company’s weighted-average cost of capital can be calculated as follows: Cost of Tax Weighted Weight Capital Effect Cost Bonds 40% × 10% × 70% = 2.8% Common equity 50% 10% = 5.0% Preferred stock 10% 20% = 2.0% Totals 100% 9.8%
Answer (A) is incorrect because To calculate the after-tax cost of capital, the component should be multiplied by 1 minus the tax rate, not the tax rate itself. Additionally, there is no tax savings associated with common and preferred stock.
Answer (B) is incorrect because There is no tax savings associated with common stock and preferred stock.
Answer (C) is incorrect because To calculate the after-tax cost of capital, the component should be multiplied by 1 minus the tax rate, not the tax rate itself.
|
What is the weighted-average after-tax cost of capital for this company?
