Targaryen Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock,...

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Targaryen Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock,...

Targaryen Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Its cost of equity is 10 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 23 percent.

a.	What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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Answer 1

Answer #1

aftertax cost of debt=6(1-tax rate)

=6(1-0.23)=4.62%

WACC=Respective costs*Respective weights

=(0.7*10)+(0.05*5)+(0.25*4.62)

=8.41%(Approx).

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Answer 2

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