Question

# You were hired as a consultant to Giambono Company, whose target capital structure is 40%...

You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of common equity is 12.25%. The firm will not be issuing any new stock. What is its WACC? Answer is a percentage

Formula for calculating WACC is:

KWACC = (WE x KE) + (WD x KD) + (WP x KP)

Where:

KWACC = Weighted average cost of capital

WE = Proportion of equity (common stock)

KE = Cost of equity (common stock)

WD = Proportion of debt

KD = After-tax cost of debt

WP = Proportion of preferred stock

KP = Cost of preferred stock

Putting values:

KWACC = (0.45 x 0.1225) + (0.40 x 0.06) + (0.15 x 0.075)

= 0.055125 + 0.024 + 0.01125

= 0.090375 or 9.04%

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