Johnson Has a Target Capital Structure of 60% Common Stock

question 36

Multiple Choice

Johnson has a target capital structure of 60% common stock, 5% preferred stock and 35% debt. The firm's cost of equity is 10%, its cost of preferred is 4% and the pretax cost of debt is 6%.   If the tax rate is 34%, what is Johnson's weighted average cost of capital? ​

• A)8.30%​
• B)7.59%​
• C)5.48%​
• D)5.55%​

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Definitions:

Bad Debts

Financial losses attributed to customers who fail to pay what they owe for purchased goods or services, often considered as an expense in accounting.

Adjustment

An accounting action that alters the value of accounts in the ledger to reflect their true balances at the period end, often related to expenses and revenues.

Balance Sheet Approach

A method in accounting that focuses on valuing assets and liabilities at their current fair market values.

Adjusting Journal Entry

A journal entry made at the end of an accounting period to allocate income and expenses to the appropriate periods.