Question

What is the Pall Mall Corp's weighted average cost of capital if its cost of pre-tax debt is 11% (25 of overall capital structure), its cost of preferred stock is 9.5%(15% of capital structure) and its cost of equity is 15.5% (60% of the capital structure)? The marginal tax rate is 35%

a.12.5 b.13.5 c.12.3% d 11.7

Answer 1

As per the details given in the information-
Correct Answer is option A- 12.5%
WACC = Wd*kd + We*ke + Wp*Kp
We = weight of equity
Wp = weight of preference share
Wd = weight of debt
Cost of debt after tax = Cost of debt pretax ( 1- t)
Kd = 11 ( 1- 0.35)
Kd = 7.15
Ke=15.5
Kp =9.5
WACC = Wd*kd + We*ke + Wp*Kp
WACC = .25*7.15 + 0.6*15.5 + .15*9.5
WACC =12.5%

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