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PLEASE SHOW YOUR WORK Assuming a target capital structure of:      40%     debt      20%     preferred...

PLEASE SHOW YOUR WORK

Assuming a target capital structure of:

     40%     debt

     20%     preferred stock

     40%     common equity

What would be the WACC given the following: all debt will be from the sale of bonds with a coupon of 10% (assume no flotation costs), preferred stock's associated cost will be 13%, and common equity will be from retained earnings with an associated cost of 15%. The tax rate for this corporation is 30%.

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Answer #1

Weighted average cost of capital (WACC)=Weight of common equity*Cost of common equity+Weight of debt*Cost of debt*(1-tax rate)+Weight of preferred stock*Cost of preferred stock
Given that:
Weight of common equity=40%
Weight of debt=40%
Weight of preferred stock=20%
Cost of debt=10%
Cost of preferred stock=13%
Cost of common equity=15%
Tax rate=30%
Substituting these values in the equation of WACC, we get:
WACC=Weight of common equity*Cost of common equity+Weight of debt*Cost of debt*(1-tax rate)+Weight of preferred stock*Cost of preferred stock
=40%*15%+40%*10%*(1-30%)+20%*13%
=6.00%+4.00%*0.7+2.600%
=6.00%+2.80%+2.600%
=11.40%

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