The Weighted Average Cost of Capital

For a firm with three sources: debt, preferred stock and common stock, the cost of capital is the weighted average cost of all these three source :

(a) A firm borrows money at 6% after taxes and pays 9% for preferred stock and 12% for common stock. The company raises capital in equal proportions i.e. 1/3 debt and 1/3 preferred stock and 1/3 common stock. The tax rate is 30%.

WACC =

(b) A firm borrows money at 6% before taxes and pays 9% for preferred stock and 12% for common stock. The company raises capital in equal proportions i.e. 1/3 debt and 1/3 preferred stock and 1/3 common stock. The tax rate is 30%.

WACC =