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Raylan Givens Incorporated has a target capital structure of 28.00% notes payable (debt), 5.00% preferred stock,...

Raylan Givens Incorporated has a target capital structure of 28.00% notes payable (debt), 5.00% preferred stock, and 67.00% common stock. Currently, banks want 7.00% on their notes, preferred stock owners would like 11.00%, while common stock holders require 13.00%. If the marginal tax rate is 34.00%, find the weighted average cost of capital for Givens.

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Answer #1

WACC = (E/V x Re) + ((D/V x Rd) x (1 – T)) + (PS/V x Rp)

Where:

E = market value of the firm’s equity (market cap) = 67%

D = market value of the firm’s debt = 28%

PS = market value of the firm’s preferred stock = 5%

V = total value of capital (equity plus debt) =100%

Re = cost of equity (required rate of return) =13%

Rd = cost of debt (yield to maturity on existing debt) = 7%

Rp = cost of preferred stock = 11%


T = tax rate = 34%

Using the above formula

WACC =>

Value Cost After-tax weighted cost
D 28% 7% 0.0871
PS 5% 11% 0.012936
E 67% 13% 0.0055
100% WACC 10.55%

= 10.55%

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