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Testbank, Question 10 MinMax Corp has the following capital structure: 55% equity (giving a return of...

Testbank, Question 10 MinMax Corp has the following capital structure: 55% equity (giving a return of 9%), 10% preferred shares (with a yield of 6%), and 35% debt (with a coupon rate of 10% and yield to maturity of 6.5%). If there are no taxes, what is the firm’s WACC? 10.333% 9.050% 7.825% 6.915%

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Answer #1

Information provided:

Weight of equity= 55%

Weight of preference shares= 10%

Weight of debt= 35%

Return of equity= 9%

Yield of preference shares= 6%

Yield to maturity= 6.5%

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= 0.35*6.5% + 0.10*6% + 0.55*9%

            = 2.2750 + 0.6 + 4.950

            = 7.8250%

Hence the answer is option c.

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

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