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I am doing an assignment that is asking for weighted averages. I have been given the following information:

$50 million in bonds which pay a 5.5% coupon; $20 million in preferred stock with a par value of $50 per share and an annual dividend of $2.75 per share; and common stock with a book value of $25 million.  The cost of capital associated with common stock is 12% and the marginal tax rate for the firm is 30%.

In trying to complete the WACC calculations, I have come up with the following:

WACC= (E/ V x r E) + (D/V x rD x (1-t))

Where: E = market value of Equity (Preferred stock + Common Stock)               45,000,000

           D= market value of Debt (bonds)                                                            50,000,000

          V = total value of the firm (E + D)                                                           95,000,000

           E/V - percentage of capital that is equity (45,000,000 / 95,000,000)        .47368

           D/V - percentage of capital that is debt    (50,000,000 / 95,000,000)       .52631

          t = corporate tax rate                                                                                          30%

My problem comes in that I cannot figure out the cost of equity and cost of debt for this problem. I have been trying to work with the following equations:

       r e = the cost of equity (V E / V E + VD )

                       r d = the cost of debt   (V D / V E + V D )

But I have come up with three entirely different answers for the problems. can you give me some idea on how I should be filling this in?

Thank you,

Julie Evans

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