Question

Mirion Tech, Inc., has rE of 12%, an rD of 6%, at a debt-equity ratio of 0.50. Mirion plans to raise enough preferred stock to retire half of their outstanding common stock, which currently has a market value of $7 million. If the preferred stock has an expected rate of return of 10%, what is the new WACC? (Assume a 21% marginal corporate tax rate and that rD remains at 6%.)

Answer 1

Old Weights :

Debt Ratio = Debt / [ Debt + Equity ]

= 0.5 / [ 0.5 + 1 ]

= 0.5 / 1.5

= 0.3333

Equity ratio = 0.6666 [ 1 - 0.3333]

New Ratios:

Debt - Same as earlier i.e 0.3333

Equity Weight - 0.6666 * 50%

= 0.3333

Preference share weight - 0.6666 * 50%

= 0.3333

COst after Tax debt = Cost of debt ( 1 - Tax Rate )

= 6% ( 1 - 0.21)

= 6% * 0.79

= 4.74%

WACC = weighted avg cost of sources in capital structure

Source	Weight	Cost	Wtd Cost
Debt	0.3333	4.74%	1.58%
Common Stock	0.3333	12%	4.00%
Pref Shares	0.3333	10%	3.33%
WACC	8.91%