Question

13.) You were hired as a consultant to XYZ Company, whose target capital structure is 35% debt, 9% preferred, and 56% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 4.75%, the cost of common from retained earnings is 13.10%, and the tax rate is 27.00%. The firm will not be issuing any new common stock. What is XYZ's WACC?

Answer 1

Answer:

WACC = (Weight of Debt * After Tax Cost of Debt) + (Weight of Preferred Stock * Cost of Preferred Stock) + (Weight of Equity * Cost of Equity)

Weight of Debt = 0.35
After Tax Cost of Debt = 0.065 * (1 – 0.27) = 0.04745
Weight of Preferred Stock = 0.09
Cost of Preferred Stock = 0.0475
Weight of Common Equity = 0.56
Cost of Equity = 0.1310

WACC = (0.35 * 0.04745) + (0.09 * 0.0475) + (0.56 * 0.1310)
WACC = 0.01661 + 0.00428 + 0.07336
WACC = 0.09424
or WACC = 9.42%

WACC of XYZ is 9.42%.