Question

A firm has a​ long-term debt of $54,000​ common equity of $94,000​, and preferred stock of $16,000. What is its current capital​ structure? If debt costs 10.1 % pretax, preferred stock costs 12 % and equity costs 15.2 % what is the WACC​ (assuming a 40% tax​ rate)?

A The total value of the capital is

B The weight of the debt component is

C The weight of the preferred stock component is

D The weight of the equity component is

Answer 1

Given about a firm,

Long-term debt = $54000

common equity = $94000

Preferred stock $16000

A). So, total value of capital = Lon-term debt + common equity + preferred stock = 54000+94000+16000 = $164000

B). Weight of debt Wd = Long-term debt/total capital = 54000/164000 = 32.93%

C). Weight of preferred stock Wp = Preferred stock/Total capital = 16000/164000 = 9.76%

D). Weight of equity We = Common equity/Total capital = 94000/164000 = 57.32%

Pretax cost of debt Kd = 10.10%

Cost of preferred stock Kp = 12%

Cost of equity Ke = 15.20%

Tax rate T = 40%

So, Weighted average cost of capital WACC = Wd*Kd*(1-T) + Wp*Kp + We*Ke

=> WACC = 0.3293*10.1*(1-0.4) + 0.0976*12 + 0.5732*15.2 = 11.88%

So, Weighted average cost of capital of the firm WACC is 11.88%