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Haseeb
Haseeb , Management Accountant
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Experience:  CMA
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(Weighted average cost of capital) The target capital structure

Resolved Question:

(Weighted average cost of capital) The target capital structure for QM Industries is 40 percent common stock, 10 percent preferred stock, and 50 percent debt. If the cost of equity for the firm is 18 percent, the cost of preferred stock is 10 percent, the before-tax cost of debt is 8 percent, and the firm’s tax rate is 35 percent, what is QM’s weighted average cost of capital?
Submitted: 6 years ago.
Category: Finance
Expert:  Haseeb replied 6 years ago.
Hi Dear,

Solution,

Kd (tax adjusted cost of debt) = 8 (1 - .35) = 5.2 %

Source of Funds

Proportion

Cost

Weighted



a

b

a x b

Debt (after tax)

50%

5.2%

2.60%

Preference stock

10%

10.0%

1.00%

Common stock

40%

18.0%

7.20%

QM's Weighted Average Cost of Capital

10.80%



Edited by Haseeb on 4/17/2010 at 7:26 PM EST
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