Weighted average cost of capital : Solution set

1. Weighted average cost of capital

Jackson Technology's capital structure is as follows:
Debt 35%
Preferred stock 15
Common equity 50

The after-tax cost of debt is 6.5 percent; the cost of preferred stock is 10 percent; and the cost of common equity (in the form of retained earnings) is 13.5 percent. Could you calculate Jackson Technology's weighted average cost of capital.

2. How does the capital asset pricing model help explain changing costs of capital?

3. Will you explain to me in detail the relationship between the cost of capital, bond ratings, and the capital budgeting decision-making process.