Vandalay Industries has $30 million of debt, $10 million of preferred stock and $60 million of...
Vandalay Industries has $30 million of debt, $10 million of preferred stock and $60 million of common stock outstanding. The market cost of debt is 8%, the cost of preferred is 9% and the cost of common equity is 14%. The firm has a 35% corporate tax rate. What is Vandalay's WACC?
Homework Answers
The weighted average cost of capital (WACC) is found using the following equation
WACC = we re + wp rp
+ wd rd 
( 1 - tax rate)
we = weight of equity = $ 60 million 
( $ 30 + $ 10 + $ 60 ) million = 0.6
re = cost of equity = 14%
wp = weight of preferred capital = $ 10 million
$ 100 million = 0.10
rp = cost of preferred capital = 9 %
wd = weight of debt = $ 30 million
$ 100 million = 0.30
rd = cost of debt = 8 %
WACC = 0.6
0.14 + 0.10
0.09 + 0.30
0.08
( 1 - 0.35)
The company's WACC = 10.86 %
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