Optimal Capital Structure Calculation for West Coast Bhd

What are the component costs of debt, preferred share, and common share for West Coast Bhd according to the given data? The component costs are as follows: a) Debt - kd = 5.68% b) Preferred Shares - kp = 11.10% c) Common Shares - ke = 13.47%

Component Costs Calculation

Debt: The cost of debt (kd) is calculated as follows:
kd = [(10/100) × 1000 + (5/100) × 1000]/(1000 - (5/100) × 1000) = 5.68%

Preferred Shares: The cost of preferred shares (kp) is calculated using the formula:
kp = (12/100) × 100 + (1.50/100) × 100 - 10/100 × 110 = 11.10%

Common Shares: The cost of equity (ke) is calculated as:
ke = (2.5 × (1 + 6%))/22.50 × (1 - 0.10) + 6% = 13.47%

Weighted Average Cost of Capital (WACC) Calculation

The WACC is calculated using the formula:
WACC = wd kd (1 - T) + wp kp + we ke

Where, wd, wp, and we are the weight of debt, preferred stock, and common stock respectively, kd is the before-tax cost of debt, kp is the cost of preferred stock, ke is the cost of equity, and T is the tax rate.

To find the weight of each component, the following formulas are used:
Weight of debt = Book value of debt/Total capital
Weight of preferred shares = Market value of preferred shares/Total capital
Weight of common shares = Market value of common shares/Total capital

Using the given data, the weights are determined as follows:
Weight of Debt = 88.6%
Weight of Preferred Shares = 0.98%
Weight of Common Shares = 10.42%

With these weights, the WACC for West Coast Bhd is computed as:
WACC = 7.79%

Therefore, the firm's WACC is 7.79%.

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