Question

You were asked to estimate the cost of capital for XYZ Inc. The firm is expected to have a target capital structure of 30% debt, 20% preferred, and 50% common equity. The after-tax cost of debt is 4.50%, the cost of preferred stock is 6.00%, and the cost of retained earnings is 11.50%. The firm does not plan to issue any new stock. What is its WACC

Answer 1

8.30%

Step-by-step explanation:

The weighted average cost of capital of the company is computed using the WACC formula below:

WACC=(We*Ke)+(Wp*Kp)+(Wd*kd)

We=weight of common equity=50%

Ke=cost of retained earnings which is a proxy for the cost of equity=11.50%

Wp=weight of preferred stock=20%

Kp=cost of preferred stock=6.00%

Wd=weight of debt=30%

Kd=after-tax cost of debt=4.50%

WACC=(50%*11.50%)+(20%*6.00%)+(30%*4.50%)

WACC=8.30%