Question

Pfd Company has debt with a yield to maturity of 6.6%​, a cost of equity of 12.6%​, and a cost of preferred stock of 8.8%. The market values of its​ debt, preferred stock, and equity are $10.4 ​million, $2.8 ​million, and $15.8 ​million, respectively, and its tax rate is 40% What is this​ firm's after-tax​ WACC? ​Note: Assume that the firm will always be able to utilize its full interest tax shield.

Answer 1

- Market values of​ Debt = $10.4 million

Market values of Preferred stock = $2.8 million

Market values of Equity = $15.8 million

Total Capital Structure = $10.4 million + $2.8 million+ $15.8 million = $29 million

Calculating firm's after-tax​ WACC:-

WACC= (Weight of Debt)(Before-Tax Cost of Debt)*(1- Tax rate) + (Weight of Common stock)(Cost of Equity) +(Weight of Preferred Stock)(Cost of Preferred Stock)

WACC = ($10.4M/$29M)(6.6%)*(1-0.40) + ($15.8M/$29M)(12.6%) + ($2.8M/$29M)(8.8%)

WACC = 1.4201% + 6.8648% + 0.8497%

WACC = 9.13%

So, firm's after-tax​ WACC is 9.13%

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