Answer :
Final answer:
Weighted Average Cost of Capital (WACC) is calculated using the market values and costs of all sources of capital, including common stock, preferred stock, and debt. The costs of debt is adjusted for tax effects. The weights for each type of capital are calculated and then applied to the respective costs of capital, and the results are summed up to obtain the WACC.
Explanation:
The Weighted Average Cost of Capital (WACC) is a measure of the overall cost of capital of a firm, taking into account the proportions of different types of financing used, including common equity, preferred equity, and debt. The weights for each type of capital are computed based on market values.
In this case, the weights for common stock and preferred stock can be calculated based on their respective market prices per share, while the weight for debt can be calculated based on the market value of debt (which can be estimated using the market quote and the face value of the bond). Then, the weighted costs of various types of capital can be calculated and summed up to get the WACC. The cost of debt should be adjusted for tax effects as interest expenses are tax-deductible.
For instance, assume that the firm has equal proportions of common equity, preferred equity, and debt. In this case, the WACC would be calculated as (1/3)*(16.8%) + (1/3)*(9.1%) + (1/3)*(7.6%)*(1-34%), which equals to approximately 11.5%. Note that the actual calculation would depend on the specific proportions of different types of capital in the firm's capital structure.
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