CFA CFA Level 1 Question of the Week – Corporate Finance (WACC)

# Question of the Week – Corporate Finance (WACC)

• Author
Posts
• exam_whiz
Participant
• Undecided
2

The market values of a firmâ€™s capital are given below:

Total debt: \$7 million
Outstanding preferred stock: \$2 million
Outstanding common stock: \$12 million
Its before-tax cost of debt is 8%, cost of common equity is 12% and cost of preferred stock is 9%. Assuming companyâ€™s marginal tax rate is 35%, what is the weighted average cost of capital (WACC) for the firm?
• 10.40%
• 10%
• 9.50%
• exam_whiz
Participant
• Undecided
3

Weight of debt in the firmâ€™s capital structure = 7/ (7 + 2 + 12) = 33.3%

Weight of preferred stock in the firmâ€™s capital structure = 2/ (7 + 2 + 12) = 9.5%

Weight of common stock in the firmâ€™s capital structure = 12/ (7 + 2 + 12) = 57.1%

After-tax cost of debt = 8*(1-0.35) = 5.2%

WACC = (weight of debt*cost of debt) (weight of preferred stock*cost of preferred stock) (weight of equity*cost of equity) = 0.333*0.052 + 0.095*0.09 + 0.571*0.12 = 9.5%

• shannondaily
Participant
• Undecided
2

Woo! I got it right! ðŸ™‚