Question

All City, Inc., is financed 45% with​ debt, 6% with preferred​ stock, and 49% with common stock. Its cost of debt is 5.8%​, its preferred stock pays an annual dividend of $2.52 and is priced at $29. t has an equity beta of 1.13. Assume the​ risk-free rate is 2.1%​, the market risk premium is 7.3% and​ All City's tax rate is 35%. What is its​ after-tax WACC?

Answer 1

Cost of preferred stock = Annual dividend / price

Cost of preferred stock = 2.52 / 29

Cost of preferred stock = 0.086897 or 8.6897%

Cost of equity using CAPM = risk free rate + beta ( market risk premium)

Cost of equity = 0.021 + 1.13 ( 0.073)

Cost of equity = 0.10349 or 10.349%

After tax WACC = weight of debt * after tax cost of debt + weight of preferred stock * cost of preferred stock + weight of equity * cost of equity

After tax WACC = 0.45 * 0.058( 1 - 0.35) + 0.06 * 0.086897 + 0.49 * 0.10349

After tax WACC = 0.016965 + 0.005214 + 0.05071

After tax WACC = 0.072889 or 7.2889%