Question

Given the previous values you calculated, what is the WACC for General Dynamics?   Remember that if you couldn't solve one of the prior questions, assume a value for it and plug it in to solve for the WACC. Just list any assumptions.

Answer 1

WACC is the weighted average cost of capital.

WACC = (Weight of common stock)(cost of common stock) + (Weight of preferred stock)(cost of preferred stock) + (Weight of debt)(after-tax cost of debt)

The weights we use are the target weights of the Company.

Let us assume that the target weight of common stock:preferred stock:debt::0.4:0.3:0.3

Let us assume that the cost of common stock:preferred stock:debt::16%:12%:10%

Let us assume that the tax rate id 30%

WACC = (0.4)(16%) + (0.3)(12%) + (0.3)*((10%(1-30%))

=6.4% + 3.6% + 2.1%

=12.1%