Question

Problem 5: You estimate that your pre-tax cost of debt is 10%. The firm is paying25%...

Problem 5: You estimate that your pre-tax cost of debt is 10%. The firm is paying25% in taxes. The component cost for preferred stock is 20% and the cost of common equity is 25%. Assume that your target capital structure is comprised of 40% debt, 20% preferred stock, and 40% common stock. What is the firm’s WACC?

Homework Answers

Answer #1

Target weight of debt= 40%

Target weight of equity= 40%

Target weight of preference shares= 20%

Pretax cost of debt= 10%

Cost of equity= 25%

Cost of preferred stock= 20%

The weighted average cost of capital is calculated using the below formula:

WACC=Wd*Kd(1-t)+Wps*Kps+We*Ke

Where:

Wd= Percentage of debt in the capital structure.

Kd= The before tax cost of debt

Wps= Percentage of preferred stock in the capital structure

Kps=Cost of preferred stock

We=Percentage of equity in the capital structure

Ke= The cost of common equity.

T= Tax rate

WACC= 0.40*10%*(1- 0.25) + 0.20*20% + 0.40*25%

            = 3% + 4% + 10%

            = 17%.

In case of any query, kindly comment on the solution.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The cost of retained earnings is closest to the cost of long-term debt the cost of...
The cost of retained earnings is closest to the cost of long-term debt the cost of common stock equity zero the marginal cost of capital When the face value of a bond equals its selling price, the firms cost of the bond will be equal the coupon interest rate the firm's WACC the risk free rate the firm's WMCC Assume that the cost of equity is 10%, the pre tax cost of debt is 7% and the cost of preferred...
The firm's target capital structure is the mix of debt, preferred stock, and common equity the...
The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the firm's WACC calculation. However, if...
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%.
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the...
The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings...
A firm has a​ long-term debt of $54,000​ common equity of $94,000​, and preferred stock of...
A firm has a​ long-term debt of $54,000​ common equity of $94,000​, and preferred stock of $16,000. What is its current capital​ structure? If debt costs 10.1 % pretax, preferred stock costs 12 % and equity costs 15.2 % what is the WACC​ (assuming a 40% tax​ rate)? A The total value of the capital is B The weight of the debt component is C The weight of the preferred stock component is D The weight of the equity component...
(Weighted average Cost of Capital) Toy Masters Inc. has a target capital structure of 45% debt,...
(Weighted average Cost of Capital) Toy Masters Inc. has a target capital structure of 45% debt, 35% preferred stock, and 20% Common Stock. The before-tax costs of debt, preferred stock, and common stock are 7%, 9%, and 15%, respectively. What is Toy Masters’ after-tax WACC? Assume a 40% tax rate
Avery Corporation's target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest...
Avery Corporation's target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from reinvested earnings is 11.25%, and the tax rate is 25%. The firm will not be issuing any new common stock. What is Avery's WACC? a. 8.83% b. 8.49% c. 9.94% d. 9.55% e. 9.19%
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT