Question

May I kindly ask about calculation WACC and explain a little bit that I would like to understand how. It has current capital and new capital determine.

The comic book publishing group (CBPG) has a capital structure of $ 12 million in bonds, paying a 5% coupon, $ 5 million in preferred stock, a face value of $ 35 per share and an annual dividend of $ 1.75 per share. The company's common stock has a book value of $ 6 million. 10% common stock and the company's marginal tax rate is 33%.

The company wants to add another $ 10 million by public debt offering (corporate bond) but bonds at a coupon rate of 4% due to favorable interest rates.

Answer 1

Old capital structure		Weightage Formula	Weightage	Post tax cost	Weightage x Post tax cost
Bonds	12	=12/23	52.17%	3.35%	1.75%
Preferred stock	5	=5/23	21.74%	5.00%	1.09%
Common stock	6	=6/23	26.09%	10.00%	2.61%
Total	23		100.00%	WACC	5.44%
Post tax cost of bond = pre-tax cost of bond * (1- tax rate)
Post tax cost of bond = 5%*(1-33%)
Post tax cost of bond = 3.35%
Preferred stock cost = Preferred dividend / Preferred stock price
Preferred stock cost = 1.75/35
Preferred stock cost = 5.00%
New capital structure		Weightage Formula	Weightage	Post tax cost	Weightage x Post tax cost
Bonds	12	=12/33	36.36%	3.35%	1.22%
Preferred stock	5	=5/33	15.15%	5.00%	0.76%
Common stock	6	=6/33	18.18%	10.00%	1.82%
Public debt	10	=10/33	30.30%	2.68%	0.81%
Total	33		100.00%	WACC	4.61%
Post tax cost of bond = pre-tax cost of bond * (1- tax rate)
Post tax cost of bond = 5%*(1-33%)
Post tax cost of bond = 3.35%
Preferred stock cost = Preferred dividend / Preferred stock price
Preferred stock cost = 1.75/35
Preferred stock cost = 5.00%
Post tax cost of public debt = pre-tax cost of debt * (1- tax rate)
Post tax cost of public debt = 4% * (1- 33%)
Post tax cost of public debt = 2.68%
Current capital structure WACC	5.44%
New capital structure WACC	4.61%