The target capital structure for Jowers Manufacturing is 51% common stock, 20% preferred stock, and 29% debt. If the cost of common equity for the firm is 20.8%, the cost of preferred stock is 11.8%, and the before tax cost of debt is 10.8%, what is the cost of capital? The firm's tax rate is 34%. Jower's WACC is ?% round to the three decimal places I need simple (if possible) insturctions on how to figure please
need help this is a practice question im total lost
To calculate the weighted average cost of capital (WACC), you need to find the cost of each component of capital (common stock, preferred stock, and debt) and calculate the weighted average of these costs.
1. Calculate the cost of common equity:
Cost of common equity = cost of equity * weight of common stock
Cost of common equity = 20.8% * 51% = 10.608%
2. Calculate the cost of preferred stock:
Cost of preferred stock = cost of preferred stock * weight of preferred stock
Cost of preferred stock = 11.8% * 20% = 2.36%
3. Calculate the after-tax cost of debt:
After-tax cost of debt = before-tax cost of debt * (1 - tax rate)
After-tax cost of debt = 10.8% * (1 - 34%) = 7.128%
4. Calculate the WACC:
WACC = Cost of common equity + Cost of preferred stock + After-tax cost of debt
WACC = 10.608% + 2.36% + 7.128% = 20.096%
Therefore, the WACC for Jowers Manufacturing is 20.096% (rounded to three decimal places).
To calculate this, you need to know the target capital structure (the percentages of common stock, preferred stock, and debt) and the costs of each component of capital. Then, you multiply the weights of each component by their respective costs and sum them up to determine the overall cost of capital.