COST OF CAPITAL - CURRENT

Question 1

COMPONENT COST OF DEBT

Answer 1

EFFECTIVE RATE × (1.0 - MARGINAL TAX RATE)

Question 2

COMPONENT COST OF PREFERRED STOCK

Answer 2

CASH DIVIDEND ON PREFERRED STOCK / MARKET PRICE OF COMMON STOCK

Question 3

COMPONENT COST OF COMMON STOCK

Answer 3

CASH DIVIDEND ON COMMON STOCK ÷ MARKET PRICE OF COMMON STOCK

Question 4

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

Answer 4

MARKET VALUE OF FIRM EQUITY / CAPITAL USED TO GENERATE PROFITS × COST OF EQUITY + MARKET VALUE OF FIRM DEBT / CAPITAL USED TO GENERATE PROFITS × COST OF DEBT × (1 - T)

(CAPITAL USED TO GENERATE PROFITS = MARKET VALUE OF FIRM EQUITY AND DEBT)