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The Cloud Corporation uses debt, preferred stock, and common stock to raise capital. The firm's capital structure targets the following proportions: debt, 35%; preferred stock, 15%; and common stock, 50%. If the cost of debt is 8.7%, preferred stock costs 9.2%, and common stock costs 11.5%, what is Cloud’s weighted average cost of capital (WACC)? a. 10.18% b. 2.51% c. 9.11 d. 1.63%

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Answer:

Cloud’s weighted average cost of capital (WACC) = 10.18%

Explanation:

[tex]WACC = ke*we+kd*wd+kp*wp[/tex]

where ke= cost of equity

we=weight of equity capital in the capital structure

kd=cost of debt capital

wd=weight of debt capital in the capital structure

kp= cost of preffered stock

wp=weight of preffered stock in the capital structure

* note that [tex]we+wd+wp = 1[/tex]

therefore from the given information, since

[tex]WACC = ke*we+kd*wd+kp*wp[/tex] = [tex]0.115*0.5+0.087*0.35+0.092*0.15 = 10.18%[/tex]

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