Question

Consider a company financed with 0.9 equity, 0.0 preferred stock, and the remaining debt subject to...

Consider a company financed with 0.9 equity, 0.0 preferred stock, and the remaining debt subject to a corporate tax rate 0.4 If the required rate of return on the debt is 0.06, on the preferred stock is 0.10 and on the common stock is 0.13, what is the working average cost of capital for this company?

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Answer #1

The weighted average cost of capital is calculated using the below formula:

WACC=Wd*Kd(1-t)+Wps*Kps+We*Ke

where:

Wd= Percentage of debt in the capital structure.

Kd= The before tax cost of debt

Wps= Percentage of preferred stock in the capital structure

Kps=Cost of preferred stock

We=Percentage of common stock in the capital structure

Ke= The cost of common stock

T= Tax rate

WACC= 0.1*6%*(1 – 0.40) + 0*10% + 0.9*13%

            = 0.36% + 0% + 11.70%

            = 12.06%

In case of any query, kindly comment on the solution.

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