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The components of capital are long-term debt and equity, which includes both common stock and retained earnings. Accounts payable is a current liability, and it is not a component of capital or of the calculation of the cost of capital. The total of long-term debt, common stock and retained earnings is $25,000,000. Therefore, the calculation of the company's weighted average cost of capital, based upon the information given, is as follows Long-term debt: 10/25 × .08 = .032 Common stock: 10/25 × .15 = .060 Retained earnings: 5/25 × .18 = .036 Weighted average cost of capital .128
This is the cost of the long-term debt. Long-term debt is not the only component of capital.
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This is an unweighted average of the rates for accounts payable (0%), long-term debt (8%), common stock (15%) and retained earnings (18%). There are two errors in this answer: (1) the accounts payable should not be included, as accounts payable is short-term debt and not capital; and (2) the costs of the other three components of capital should be weighted according to each component's proportion of total capital.