Stock and Weighted Average Cost
Q1: The Target Capital structure for Kaynat Manufacting is 50% common stock, 15% preferred stock, and 35% debt. If the cost of common equity for the firm is 19.6%, the cost of preferred stock is 12.9% and the before tax cost of debt is 9.5% what is the weighted average cost of capital? The firm's tax rate is 35%. Answer: WACC = (50% x 19.6%) + (15% x 12.9%) + ( 35% x 9.5% x 65% =
Q2: The following are the information of a company:
|Type of capital |Book value (Tk) |Market value (Tk) |Specific cost (%) |
| | | | |
|Debt |300000 |380000 |7% |
| |200000 |220000 |8% |
|Preference share |600000 |600000 |14% |
| |200000 |500000 |11.2% |
|Equity share | | | |
|Retained earnings | | | |
| | 1300000 | 1700000 | |
Determine the weighted average cost of capital using (A) Book value weights and, (B) Market value weights. How are they different? Can you think of a situation where the weighted average cost of capital would be the same using either of the weights?
Solution (A) Weighted Average Cost of Capital (WACC)
|Type of capital |Book |Capital |Specific |Weighted |
| |value (Tk) |ratio |cost (Tk) |Average |
|(1) |(2) |(3) = (2)/Sum2 |(4) |(5)
Q2: The following are the information of a company:
|Type of capital |Book value (Tk) |Market value (Tk) |Specific cost (%) |
| | | | |
|Debt |300000 |380000 |7% |
| |200000 |220000 |8% |
|Preference share |600000 |600000 |14% |
| |200000 |500000 |11.2% |
|Equity share | | | |
|Retained earnings | | | |
| | 1300000 | 1700000 | |
Determine the weighted average cost of capital using (A) Book value weights and, (B) Market value weights. How are they different? Can you think of a situation where the weighted average cost of capital would be the same using either of the weights?
Solution (A) Weighted Average Cost of Capital (WACC)
|Type of capital |Book |Capital |Specific |Weighted |
| |value (Tk) |ratio |cost (Tk) |Average |
|(1) |(2) |(3) = (2)/Sum2 |(4) |(5)