Copernicus Inc. has determined that its target capital structure will
be 60% debt, 10% preferred stock, and 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 weighted average cost of capital
(WACC).

Hi!!


WACC is calculated by summing the weighted cost of each capital
component, that is by multiplying the cost of each capital source by
its proportional weight and then summing:


WACC = (1-Tax)*(D/V)*R_debt + (E/V)*R_equity + (P/V)*R_preferred


where:
E = the market value of the firm's equity
D = the market value of the firm's debt
P = the market value of the firm's preferred stocks
V = D + E + P
E/V = proportion of financing that is equity
D/V = proportion of financing that is debt
P/V = proportion of financing that is preferred stock
Tax = tax rate
R_preferred = cost of preferred stock
R_equity  = cost of equity (common stock)
R_debt  = cost of debt


For this problem we have that:

E/V = 0.30
D/V = 0.60
P/V = 0.10
Tax = 0.40
R_preferred = 0.14
R_equity  = 0.16
R_debt  = 0.10

Then WACC is:

WACC = (1-Tax)*(D/V)*R_debt + (E/V)*R_equity + (P/V)*R_preferred =
     = (1-0.40)*0.60*0.10 + 0.30*0.16 + 0.10*0.14 =
     = 0.036 + 0.048 + 0.014 =
     = 0.098 OR 9.80%

The WACC is 9.8%


For additional reference see the following Word document:
"More on Company Cost of Capital":
http://www.business.uiuc.edu/weisbenn/521_2004/group_project/WACC_521_2004.doc


I hope that this helps you. Feel free to request for a clarification
if you need it.

Best regards.
livioflores-ga