Question

Shi Import-Export's balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi's tax rate is 25%, rd= 6%, rp, = 5.8%, and r, = 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?

Answer 1

Solution:-

As per old capital Structure WACC will be-

RD after Tax = 6%(1 - 0.25)

RD after Tax = 4.50%

WACC = RD after Tax * Weight of debt + Rp * Weight of Preferred stock + RE * Weight of Equity

WACC =

WACC = 7.73%

As per New capital Structure WACC will be-

RD after Tax = 6%(1 - 0.25)

RD after Tax = 4.50%

WACC = RD after Tax * Weight of debt + Rp * Weight of Preferred stock + RE * Weight of Equity

WACC =

WACC = 9.44%

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