Question

A factory currently has a equity position of $ 4,000,000 with a cost of 10%, the...

A factory currently has a equity position of $ 4,000,000 with a cost of 10%, the preferred equity position is $2,000,000 with an annual cost of 15%, the company's debt cost is 6%. The company has assets worth $ 9,000,000. tax rate is 40%. Please calculate the WACC.

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Answer #1

Total value of assets = $9,000,000

Value of equity = $4,000,000

Value of preferred stock = $2,000,000

Value of debt = $9,000,000 - $4,000,000 - $2,000,000

= $3,000,000.

Value of debt is $3,000,000.

Weight of equity = $4,000,000 / $9,000,000

= 44.44%

Weight of Preferred stock = $2,000,000 / $9,000,000

= 22,22%

Weight of debt = $3,000,000 / $9,000,000

= 33.33%

Now,

WACC is calculated below:

WACC = (44.44% × 10%) + (22.22% × 15%) + (33.33% × 6%) × (1 - 40%)

= 4.44% + 3.33% + 1.20%

= 8.98%

WACC of company is 8.98%.

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