Question

PFD cmpany has a debt with a yeild to maturity of 7%, a cost of equity of 13%, and a cost of preferred stock of 9%. The market values of its debt, preferred stock and equity are $10 million, $3 million, $15 million, respectively, and its tax rate is 40%. What is this company's WACC?

Answer 1

Cost of Debt = Yield to Maturity * ( 1-Tax rate)

= 7% * ( 1-40%)

= 4.20%

WACC = Cost of Debt * Weight of Debt + Cost of Equity * Weight of Equity+ Cost of Preferred Stock * Weight of Preferred Stock

=

	Market Value	Weight ( Respective Value / Total Value)	Cost	Weight * Cost
Equity	15000000	0.535714286	13%	0.069642857
Debt	10000000	0.357142857	4.20%	0.015
Preferred Stock	3000000	0.107142857	9%	0.009642857
Total	28000000	WACC		0.094285714
		WACC %		9.43

Hence the correct answer is 9.43%