Global Technology's capital structure is as follows: Debt 35% Preferred stock 15% Common equity 50% The aftertax 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. Calculate Global Technology's weighted average cost of capital in a manner similar to Table 11-1. Solution Problem 11-19 Instructions Complete the table below by entering formulas. United Business Forms Cost (aftertax) Weighted Cost Weights Debt (Kd) FORMULA 35% FORMULA Preferred stock (Kp) FORMULA 15% FORMULA Common equity (Ke) (retained earnings) FORMULA 50% FORMULA Weighted average cost of capital (Ka) FORMULA Please provide the Excel formulas with the solution.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Global Technology's capital structure is as follows: Debt 35%
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