You were hired as a consultant to Gambino Company, whose target capital structure is 60% debt,...

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You were hired as a consultant to Gambino Company, whose target capital structure is 60% debt,...

You were hired as a consultant to Gambino Company, whose target capital structure is 60% debt, 15% preferred, and 25% common equity. The before-tax cost of debt is 8.00%, the cost of preferred is 7.02%, and the cost of retained earnings is 15.75%. The firm will not be issuing any new stock. What is its WACC? State in percentage terms without the percent sign symbol and round to the second decimal place. (Thus, 12.98756% would be written as 12.99 to be correct)

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Answer 1

Answer #1

WACC = (Weight of common stock * Cost of common equity) + (Weight of preferred stock * Cost of preferred stock) + (Weight of debt * Pretax cost of debt)

WACC = (0.25 * 0.1575) + (0.15 * 0.0702) + (0.60 * 0.08)

WACC = 0.0979 or 9.79%

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Answer 2

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You were hired as a consultant to Gambino Company, whose target capital structure is 60% debt,...

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