Question

Garnet Corporation’s optimal capital structure is 35% debt, 5% preferred stock, and 60% common equity. The cost of debt is 8%, the cost of preferred stock is 6%, and the cost of equity is 14%. The relevant tax rate is 35%. What is Garnet Corporation’s WACC?

6.00% |
||

8.00% |
||

10.52% |
||

11.50% |
||

15.00% |

Answer #1

**Answer
:-**

**Option C - 10.52%**

**.**

**Explanations :-**

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*8%*(1 – 0.35) + 0.05*6% + 0.60*14%

= 1.82% + 0.30% +8.40%

= **10.52%.**

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