Alfa Corporation (Alfa) has a target capital structure of 60% common stock, 5% preferred stock, and 35% debt. Its cost of equity is 11%, the cost of preferred stock is 5.5%, and the cost of debt is 7.2%. The relevant tax rate is 35%. i) What is Alfa’s weighted average cost of capital (WACC)? ii) The management has asked you about Alfa’s capital structure. They want to know why the company does not use more preferred stock financing, since it costs less than debt. What would you tell the management? Explain
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Alfa Corporation (Alfa) has a target capital structure of 60% common stock, 5%
i) What is Alfa’s weighted average cost of capital (WACC)?
ii) The management has asked you about Alfa’s capital structure. They want to know why the company does not use more preferred stock financing, since it costs less than debt. What would you tell the management? Explain.
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