Some problems in this chapter may require many steps. For example, you might solve for the cost of debt or the cost of equity and this use this information to then find WACC. In another example, you might solve for the capital structure weights and then use them to find the WACC.

Practice an example below that includes two steps.

#1 "A firm is considering a new project that will require an initial outlay of $20 million. It has a target capital structure of 50% debt, 8% preferred stock, and 42% common equity. The firm has non-callable bonds that mature in five years with a face value of $1,000, an annual coupon rate of 8%, and a market price of $1080.64. The yield on the companys current bonds is a good approximation of the yield on any new bonds that are issued. The cost of preferred stock for the firm is 12.5% and the cost of common equity is 14%. The firm has a marginal tax rate of 35%. Determine the firms WACC for this project"

Step 1. Find the cost of debt (the yield to maturity on outstanding bonds)

Step 2. Input all of the necessary variables into the WACC equation

		10.83%
		8.00
		9.92%
		8.86%

#2 The Weighted Average Cost of Capital is sometimes called the Opportunity Cost of Capital because there is a cost of using financing.

Calculate the opportunity cost of capital for a firm with the following capital structure: 30% preferred stock, 50% common stock and 20% debt.The firms has a cost of debt of 6.61%, a cost of preferred stock equal to 10.19% and a 13.31% cost of common stock. The firm has a 20% tax rate. You answer should be entered as a %, for example 15.48%