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(Weighted average cost of capital) The target capital structure

 
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  • Answered by:Haseeb
  • Management Accountant
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  • Accepted Answers: 46
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Customer 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: 1084 days and 4 hours ago.
Category: Finance
Value: $9
Status: CLOSED

Accepted Answer

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Expert:  Haseeb replied 1084 days and 2 hours 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%

Haseeb40285.8098010764

Expert TypeManagement Accountant
Category: Finance
Pos. Feedback: 100.0 %
Accepts: 46
Answered: 4/17/2010

Experience: CMA

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