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Please see attached requirements for writing an analysis of the described company situation. The focus is on weighted average cost of capital.

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Outline

Weighted average cost of capital.

Introduction

Calculation of weights

Calculation of the cost of capital of the various sources of capital

a) Cost of equity

b) Cost of preferred stock

c) Cost of debt

Calculation of WACC

Decision

1

Student’s name

Professor name

Course

Date

Weighted Average Cost of Capital

Introduction

The weighted average cost of capital represent the overall cost of capital of a firm from using the

various sources of finance. Ideally, a firm uses finances from multiple sources such as equity,

debt, preferred stock, etc. All these sources attract various costs and the computation of WACC

shows the combined effect of these sources of capital. Therefore, weighted average cost of

capital is the average rate of return in a firm from using various sources of capital. In the

calculation of WACC, the respective proportions of the various sources of capital are computed

to get the weights attached to every source of capital (Richard et.al, 2016). The weights are

multiplied with the respective cost of capital of each source and the result aggregated to get the

overall cost of capital.

The formula for calculation of WACC is given by the following formula:

D

P

E

WACC = K d + K p + K e

V

V

V

Where

WACC is the weighted average cost of capital

Kd is the cost of debt

Kp is the cost of preference shares

Ke is the cost of equity

2

D,

P,

E

is the proportions (weights) of debt, preferred stocks

V

V

V

and equity in capital structure

In the case given for Premier, the firm uses debt, equity and preferred stock in its capital structure.

The calculation of WACC will involve calculating the weights attached to each of these sources of

capital, calculating the cost of capital of each source and finally computation of the weighted

average cost of capital.

Calculation of weights

Weights are the proportions of each of the source of capital employed in the firm. The computation

of the weights is shown below:

Source

Value

Weights

Equity (Common stock)

8,000,000

8,000,000

Debt (bonds

10,000,000

10,000,000

Preferred stock

2,000,000

2,000,000

Total

20,000,000

20,000,00...

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