Question

Your company has a target capital structure of 40% debt, 15% preferred, and 45% common equity....

Your company has a target capital structure of 40% debt, 15% preferred, and 45% common equity. Your bonds carry a 9% coupon, have a par value of $1,000, and 7 years remaining until maturity. They are currently selling for $950.51. The cost of preferred is 7.50%. The risk free rate is 4%, the market risk premium is 8%, and beta is 1.0. The firm will not be issuing any new stock, and the tax rate is 40%. What is its WACC?

a. 6.69% b. 7.68% c. 8.93% d. 6.96% e. 7.59%

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1


Correct Answer is option C - 8.93%
WACC = Wd*kd + We*ke + Kp*Wp
We = Weight of equity
Wd = weight of debt
Wp = Weight of preference

Re = Rf + (Rm -Rf)*beta
Re = 4+ (8)*1
Re = 12%

To calculate the cost of debt, enter the stock in the financial calculator-
PV = -950.51
Fv = 1000
PMT = 90 (1000*9% = 90)
N = 7
CPT - I/Y = 10.02

Cost of debt afte tax = Interest (1-t)
Cost of debt after tax = 10.02 (1-0.40)
Cost of debt after tax = 6.012

Kd = 6.012%
Kp = 7.5%
Ke = 12%

WACC = Wd*kd + We*ke + Kp*Wp
WACC = 0.4*6.012 +0.45*12 + 0.15*7.5
WACC =8.93%

I hope this clear your doubt.

Feel free to comment if you still have any query or need something else. I'll help asap.

Do give a thumbs up if you find this helpful.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Pearson Motors has a target capital structure of 45% debt and 55% common equity, with no...
Pearson Motors has a target capital structure of 45% debt and 55% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 9%, and its tax rate is 40%. Pearson's CFO estimates that the company's WACC is 13.20%. What is Pearson's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.
Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common...
Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%. If its current tax rate is 40%, how much...
Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common...
Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 8.2%, and its cost of preferred stock is 9.3%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.4%. However, if it is necessary to raise new common equity, it will carry a cost of 14.2%. If its current tax rate is 25%, how much...
Consider the following capital structure for AAA Corporation. The company has one debt issue, preferred stock...
Consider the following capital structure for AAA Corporation. The company has one debt issue, preferred stock and common stock in its capital structure. The firm’s tax rate is 40%; the risk-free rate is 3%. Details on the components of the capital structure are listed below. Bond issue: Preferred equity: Common equity: Coupon-paying issue $100 million par 10% semiannual coupon Remaining maturity of 15 years Currently priced in market at 90% of par value Coupon-paying issue $50 million par 6% annual...
XYZ Company’s target capital structure is 40% debt and 60% common equity. The XYZ doesn’t carry...
XYZ Company’s target capital structure is 40% debt and 60% common equity. The XYZ doesn’t carry any preferred stocks. Theafter-tax cost of debt is 6.00% and the cost of retained earnings is 10.25%. The cost of ne issuing stocks is 12%. XYZ currently has retained earning of 50,000 and needs an additional capital of $100,000. To maintain the same capital structure, What is its WACC?
Pearson Motors has a target capital structure of 40% debt and 60% common equity, with no...
Pearson Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 12%, and its tax rate is 25%. Pearson's CFO estimates that the company's WACC is 10.30%. What is Pearson's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.
Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common...
Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%. If its current tax rate is 25%, how much...
Preston Corp. is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent...
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 5.46 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...
Your company is estimating its WACC. Its target capital structure is 35 percent debt, 10 percent...
Your company is estimating its WACC. Its target capital structure is 35 percent debt, 10 percent preferred stock, and 55 percent common equity. Its bonds have a 10 percent coupon, paid semi-annually, $1000 par value, a current maturity of 8 years, and sell for $950. The firm’s preferred stock sell for $75 and pay quarterly dividend of $2. This company’s beta is 1.25, the risk-free rate is 4 percent, and the expected market return is 9 percent. The firm's marginal...
Your company is estimating its WACC. Its target capital structure is 35 percent debt, 10 percent...
Your company is estimating its WACC. Its target capital structure is 35 percent debt, 10 percent preferred stock, and 55 percent common equity. Its bonds have a 10 percent coupon, paid semi-annually, $1000 par value, a current maturity of 8 years, and sell for $950. The firm’s preferred stock sell for $75 and pay quarterly dividend of $2. This company’s beta is 1.25, the risk-free rate is 4 percent, and the expected market return is 9 percent. The firm's marginal...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT