Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist of 40% debt, 5% preferred stock, and 55% common equity. Note that the firm's marginal tax rate is 40%. Assume that the firm's cost of debt, rd, is 8.3%, the firm's cost of preferred stock, rp, is 7.8% and the firm's cost of equity is 12.3% for old equity, rs, and 12.94% for new equity, re. What is the firm's weighted average cost of capital (WACC1) if it uses retained earnings as its source of common equity? Round your answer to 3 decimal places. Do not round intermediate calculations.
2What is the firm’s weighted average cost of capital (WACC2) if it has to issue new common stock? Round your answer to 3 decimal places. Do not round intermediate calculations.
| Cost of debt | 8.30% | ||||
| Tax rate | 40% | ||||
| After tax cost of debt | =8.30% * (1-40%) | ||||
| After tax cost of debt | 4.98% | ||||
| Based on retained earnings | |||||
| Component | Cost | Weight | Cost * Weight | ||
| Debt | 4.98% | 40.00% | 1.99% | ||
| Preferred Stock | 7.80% | 5.00% | 0.39% | ||
| Equity | 12.30% | 55.00% | 6.77% | ||
| WACC | 9.15% | ||||
| Based on new stock issue | |||||
| Component | Cost | Weight | Cost * Weight | ||
| Debt | 4.98% | 40.00% | 1.99% | ||
| Preferred Stock | 7.80% | 5.00% | 0.39% | ||
| Equity | 12.94% | 55.00% | 7.12% | ||
| WACC | 9.50% | ||||
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