Question

4. Capital Co. has a capital structure, based on current market values, that consists of 33 percent debt, 10 percent preferred stock, and 57 percent common stock. If the returns required by investors are 9 percent, 10 percent, and 17 percent for the debt, preferred stock, and common stock, respectively, what is Capital’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

Answer 1

WACC = (Proportion of Debt × After tax cost of debt) + (Proportion of Preferred Stock × Cost of Preferred Stock) + (Proportion of Common Stock × Cost of Common Stock)

WACC = [0.33 × (0.09(1 - 0.40)] + (0.10 × 0.10) + (0.57 × 0.17)

WACC = 0.1247 or 12.47%