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Cost of debt and preferred stock

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Reference no: EM131970821

The formula is as follows: W A C C = Ke * We + Kd * Wd * ( 1 - T ). Where, Ke = Cost of Equity; We = Weight of Equity; Kd = Cost of Debt; Wd = Weight of Debt; and T = Tax Rate (Corporate Finance Institute, 2016). Cost of Equity is calculated firt then the Cost of Debt and Preferred Stock. In the given question:

  • Weights of 40% debt and 60% common equity (no preferred equity)
  • A 35% tax rate
  • Cost of debt is 8%
  • Beta of the company is 1.5
  • Risk-free rate is 2%
  • Return on the market is 11%

Ke = Rf + ( Rm - Rf ) * B. Where, Rf = Risk Free Rate; Rm = Return of Market; B = Beta API's Cost of Equity: Ke = 2 % + ( 11 % - 2 % ) * 1.5 = 15.5 % Weighted Average cost of capital = 15.5 % * 60 % + 8 % * 40 % * ( 1 - 35 % ) = 11.38 % is the project feasible?

Reference no: EM131970821

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