Question

	Target % in Capital Structure	Component Cost (pre-tax)	Component Cost (after-tax)	Weighted Component Cost
Debt	25.00%
Preferred Stock	8.00%
Equity	67.00%
Tax Rate =	35.00%		WACC =
Outstanding Bond		Preferred Stock Info		Common Stock Info
(Annual Coupons)		Preferred Divided	2	Current Dividend	$3.00
Time to Maturity (years)	10	Current Market Price	45	Current Price	$81.00
Coupon Rate APR	6.00%	Preferred Yield	4.44%	Expected Growth in Dividends	3.00%
Face Value	$1,000.00			Expected Return on Equity	6.81%
Current Market Price	$1,000.00
YTM	6.00%

Based on the information in the table, what is the WACC?

Group of answer choices

6.19%

6.01%

5.90%

5.60%

Answer 1

WACC = (weight of debt * cost of debt) + (weight of preferred stock * cost of preferred stock) + (weight of common stock * cost of common stock)

The weights of each component are the target weight %.

cost of preferred stock is the preferred yield.

cost of equity is the Expected Return on Equity

cost of debt = YTM * (1 - tax rate) = 6% * (1 -35%) = 3.9%

WACC = (25% * 3.9%) + (8% * 4.44%) + (67% * 6.81%)

WACC = 5.90%