Question

Garnet Corporation’s optimal capital structure is 35% debt, 5% preferred stock, and 60% common equity. The...

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%
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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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