Question

VL Corporation making a new investment using the following capital structure: - Common Stock = $58...

VL Corporation making a new investment using the following capital structure: - Common Stock = $58 million, with an effective annual after tax interest rate of 12% - Preferred Stock= $63 million, with an effective annual after tax interest rate of 13% - Bonds = $71 million, with an effective annual after tax interest rate of 22% Compute the Weighted Average Cost of Capital (WACC) for this investment. Write your answer as percentage (e.g. if your answer is 5%, write 5 not 0.05). Note: round your answer to two decimal places, and do not include spaces, percentage signs, plus or minus signs, nor commas.

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Answer #1

Given, Common stock (E)= $58 Million, Preferred stock (P)= $63 Million and Bonds (D) = $71 Million.

Hence total capital (V)= 58+_63+71= $192 Million.

WACC=We*Re + Wp*Rp + Wd*Rd

Where We= Weight of equity (58/192= 0.302083),

Re= Cost of equity (given as 12%),

Wp= Weight of preferred stock (63/192= 0.328125)

Rp= Cost of preferred stock (given as 13%)

Wd= Weight of debt (71/192= 0.369792),

Rd= After tax Cost of debt (given as 22%)

WACC= 0.302083*0.12 + 0.328125*0.13 + 0.369792*0.22

= 0.03625 + 0.042656 + 0.08135424 = 16.03

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