Question

Your company is estimating its WACC. Its target capital structure is 35 percent debt, 10 percent preferred stock, and 55 percent common equity. Its bonds have a 10 percent coupon, paid semi-annually, $1000 par value, a current maturity of 8 years, and sell for $950. The firm’s preferred stock sell for $75 and pay quarterly dividend of $2. This company’s beta is 1.25, the risk-free rate is 4 percent, and the expected market return is 9 percent. The firm's marginal tax rate is 30 percent. What is the WACC of this company?

Answer 1

Computation of post tax cost of debt
put in calculator
FV		1000
PV		-950
N	8*2	16
PMT	1000*10%/2	50
compute I		5.48%
Pretax cost of debt 5.48%*2	10.95%
Post tax cost of debt = 10.95%*(1-30%)	7.67%
Cost of preferred dividend = Annual dividend/Price today
	2*4/75
	10.67%
Cost of equity =
	4%+(9%-4%)*1.25
	10.25%
Computation of WACC
Source	Weight	Cost	Weight*cost
Debt	35%	7.67%	2.68%
Preferred stock	10%	10.67%	1.07%
Equity	55%	10.25%	5.64%
WACC			9.39%
Answer =	9.39%