Question

Pfd Company has debt with a yield to maturity of 5.9%​,a cost of equity of 14.8%​,and a cost of preferred stock of 10.4%.The market values of its​ debt, preferred​ stock, and equity are $10.3 ​million, $3.2 ​million, and $16.7 ​million, respectively, and its tax rate is 35%.What is this​ firm's after-tax​ WACC?

​Note: Assume that the firm will always be able to utilize its full interest tax shield.

Answer 1

Hello Sir/ Mam

YOUR REQUIRED ANSWER IS 10.59%

Debt

YTM = 5.9%

Tax-rate = 35%

Post-tax Kd = 5.9%*(1-35%) = 3.835%

Now,

	Amount	Weights	Cost	WACC
Debt	10.3	34.11%	3.84%	1.31%
Preferred	3.2	10.60%	10.40%	1.10%
Equity	16.7	55.30%	14.80%	8.18%
Total	30.2			10.59%

Hence, WACC = 10.59%

I hope this solves your doubt.

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