What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity...
What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity if their respective costs are 6% after-tax, 12%, and 18%? The firm's tax rate is 21%.
Homework Answers
The formula for weighted average cost of capital (WACC) is:
WACC = we * re + wd* rd * (1 - t) + wp *rp
where, we = Percentage of equity = 40
wd = Percentage of debt = 40
wp = Percentage of preferred stock = 20
re = Cost of equity = 18%
rd * (1 - t) = After tax cost of debt = 6%
rp = Cost of preferred stock = 12%
Now, putting these values in the WACC formula, we get,
WACC = ((40% * 18%) + (40% * 6%) + (20% * 12%))
WACC = 7.2% + 2.4% + 2.4% = 12%
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