Question

Rare Minerals and Metals Inc's capital structure is briefly described below. Compute the company's weighted average cost of capital ("WACC"). The company's marginal income tax rate is 25%. Calculate to 4 decimal places. Capital Capital Structure Weights Pre-Tax Cost Bonds 0.35 7.80% Preferred Stock 0.15 11.75% Common Stock 0.50 25.00% 16.95% 15.12% 16.57% 16.31%

Answer 1

Given,

Tax rate = 25% or 0.25

Bonds weight = 0.35

Bonds pretax cost = 7.80%

Preferred stock weight = 0.15

Preferred stock pretax cost = 11.75%

Common stock weight = 0.50

Common stock pretax cost = 25.00%

Solution :-

Company's weighted average cost of capital

= [Bonds weight x bonds pretax cost x (1 - tax rate)] + [preferred stock weight x preferred stock pretax cost] + [common stock weight x common stock pretax cost]

= [0.35 x 7.80% x (1 - 0.25)] + [0.15 x 11.75%] + [0.50 x 25.00%]

= [0.35 x 7.80% x 0.75] + 1.7625% + 12.50%

= 2.0475% + 1.7625% + 12.50%

= 16.31%