Question

What is the WACC of a company with the following capitalization. The company is in the 33% tax bracket, and floatation costs add 1.2% from the firm's perspective. Market Cost/ Allocation Expected Return 0.3 Debt 5.5% Retained Earnings 0.4 9.4% Common Stock (new issue) Not enough information 8.05% 10.6% 7.69%

Answer 1

WACC = Weithted Avg cost of sources in capital structure

For Debt COst after Tax will be considered.

Cost after Tax = COst (1- Tax Rate )

= 5.5% (1 - 0.33)

= 5.5% * 0.67

= 3.685%

COst of New Equity = Cost of Retained Earnings + Floating COst

= 9.4% + 1.2%

= 10.6%

WACC:

Source	Weight	Cost	Wtd Cost
Debt	0.3	3.69%	1.11%
Retained Earnings	0.4	9.40%	3.76%
New Equity	0.3	10.60%	3.18%
WACC			8.05%