Question

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%

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.**

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