Copernicus, Inc. has determined that  its largest capital structure
will be 60% debt, 10% preferred stock, 30% common stock. As the
financial manager, the CFO has informed you that the company?s before
tax cost of debt is 10%, preferred stock is 14%, and common stock is
16%. In addition , the company?s marginal tax rate is 40%. Based on
the information provided, calculate the WACC.

The Weighted Average Cost of Capital is calculated using the formula
r* = rD (1-TC) D/V + rP (P/V) + rE (E/V) where r* is the weighted
average cost of capital, rD is the firm's current borrowing rate, TC
is the firm's
marginal income tax rate, rP is the expected rate of return on the
firm's preferred stock, rE is the expected rate of return on the
firm's common stock, D is the market value of the firm's debt, P is
the market value of the firm's preferred stock, E is the market value
of the firm's common stock, and V is the total market value of the
firm (D + P + E).
 
From the problem, we know that rE is 15%, rP is 14%, rD is 10%, D/V is
60%, P/V is 10%, E/V is 30%, and TC is 40%.
 

Plugging the above values into the Weighted Average Cost of Capital
formula given above results in an r* of 9.8%.

Sincerely,

Wonko

Shouldn't the rE be 16% instead of 15%?