Question

WACC

Shi Import-Export's balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi's tax rate is 30%, r_d = 7%, r_ps = 6.5%, and r_s = 13%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC? Round your answer to two decimal places.

%

Answer 1

WACC = 10.245% OR 10.25%

Explanation;

WACC = (Weight * Cost of equity) + (Weight * After tax cost of debt) + (Weight * Cost of preferred stock)

Weight of equity = 0.65

Weight of debt = 0.30

Weight of preferred stock = 0.05

Cost of equity = 13%

After tax cost of debt = 7% * (1 – 0.30) = 4.9%

Cost of preferred stock = 6.5%

Now, let’s calculate WACC;

WACC = (0.65 * 0.13) + (0.30 * 0.049) + (0.05 * 0.065)

= 0.0845 + 0.0147 + 0.00325

= 0.10245

= 10.245% OR 10.25%