Ghj inc. is investing in a major capital budgeting project that will require the expenditure of $16 million. the money will be raised by issuing $2 million of bonds, $4 million of preferred stock, and $10 million of new common stock. the company estimates is afterminustax cost of debt to be 7%, its cost of preferred stock to be 9%, the cost of retained earnings to be 14%, and the cost of new common stock to be 17%. what is the weighted average cost of capital for this project?

13.75%

Explanation:

Data provided in the question:

Total expenditure = $16 million

Debt = $2 million

Preferred stock = $4 million

Common stock = $10 million

After-tax cost of debt = 7% = 0.07

Cost of preferred stock = 9% = 0.09

Cost of retained earnings = 14%

Cost of new common stock = 17%

Now,

Weight of debt = $2 million ÷ $16 million

= 0.125

Weight Cost of preferred stock = $4 million ÷ $16 million

= 0.25

Weight Cost of new common stock = $10 million ÷ $16 million

= 0.625

The weighted average cost of capital for this project

= ( 0.07 × 0.125 ) + ( 0.09 × 0.25 ) + ( 0.17 × 0.625)

= 0.00875 + 0.0225 + 0.10625

= 0.1375

or

= 0.1375 × 100%

= 13.75%

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