WACC = Cost of Debt*Weight of Debt + Cost of Preferred Stock*Weight of Preferred Stock + Cost of Equity*Weight of Equity
WACC1 = 7.1%(1-40%)*40% + 6.6%*5% + 11.1%*55%
= 8.139%
WACC2 = 7.1%(1-40%)*40% + 6.6%*5% + 11.43%*55%
= 8.3205%
i.e. 8.321%
Note: Interest on debt is tax deductible
Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred...
The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the firm's WACC calculation. However, if...
The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the firm's WACC calculation. However, if...
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