Determine what is the weighted average cost of capital

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Reference no: EM13335709

As a newly hired financial analyst, your first job at VersaLife Corporation is to calculate the company's cost of capital. The present capital structure, which is considered optimal, is as follows:

Market Value

Debt $80 million

Preferred Stock $10 million

Common Equity $110 million

If VersaLife Corporation issues new debt, then the bond market expects a yield of 7.5%. Preferred stock is trading for $96, has a $100 par value and pays an annual dividend of 8% (the next dividend is due in one year). Common equity has a beta of 1.20, the market risk premium is 5%, and the risk-free rate is 3%. If the firm's tax rate is 40%,what is the weighted average cost of capital?

Reference no: EM13335709

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