Weighted average cost of capital The target capital structur

(Weighted average cost of capital) The target capital structure for Jowers Manufacturing is 52 percent common stock, 10 percent preferred stock, and 34 percent debt. If the cost of common equity for the firm is 20.8 percent, the cost of preferred stock is 12.5 percent, and the before-tax cost of debt is 10.4 percent, what is Jowers\' cost of capital? The firm\'s tax rate is 34 percent.

Solution

Average flotation cost = (0.52 x 0.208) + (0.10 x 0.125) + (0.34 x 0.104) = 0.10816+ 0.0125+0.03536 = 0.15602 = 15.602%