8.2.2 - Computing WACC
Preston Corp. is estimating its WACC. Its target capital structure
is 20 percent debt, 20 percent preferred stock, and 60 percent
common equity. Its bonds have a 12 percent coupon, paid
semiannually, a current maturity of 20 years, and sells for $1,100.
The firm could sell, at par, $100 preferred stock which pays a 8.7
percent annual dividend, but flotation costs of 5 percent would be
incurred. Preston's beta is 1.2, the risk-free rate is 3 percent,
and the market risk premium is 5 percent. The firm's marginal tax
rate is 40 percent. What is Preston's WACC?
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