### CFA Practice Question

A firm wishes to finance itself, and sells preferred stock, equity and bonds. It gets \$2 million by selling preferred stock that will pay preferred dividends of \$140,000 every year. It gets \$10 million by selling equity that buyers expect will pay dividends of 4% and grow at 5% every year. It gets \$8 million by selling 8-year 5.2% semiannual coupon of maturity value \$10 million. The tax rate is 36%. What is the firm's WACC?
A. 7.43%
B. 5.98%
C. 6.57%
Explanation: First calculate the 6 month yield on the bond using your financial calculator. Next (1+r)2 - 1 to get the 12 month yield. Multiply by (1-tax rate) to get after tax cost of capital for debt. Cost of equity is dividend yield + growth rate. Cost of preferred stock is preferred dividends/price of preferred stock. Finally weight by market (not face) values of preferred stock, equity and debt to get WACC. This question may seem long and/or hard, but better to do this in practice than in the real exam!