Question

jones company has a target capital structure of 40% debt, 10% preferred stock, and 50% common equity. The company's after-tax cost of debt is 5.1% its cost of preferred stock is 6%, its cost of retained earnings is 13.6%, and its cost of new common stock is 22.9%. The company stock has a beta of 1.7 and the company marginal tax rate is 40%. What is the company's weighted average cost of capital if retained earnings are used to fund the common equity portion

Answer 1

8.624%

Step-by-step explanation:

Bond Kd = 5.1%

Preferred stock Kp = 6%

Retained earnings Ks = 13.6%

News shares Kn = 22.9%

Tax rate = 40%

WACC = (0.40*(1-t)Kd) + (0.10*Kp) + (0.50*Ks)

WACC = (0.40*(1-0.40)*5.1 + 0.10*6 + 0.50*13.6

WACC = 0.40*0.60*5.1 + 0.60 + 6.8

WACC = 1.224 + 0.60 + 6.8

WACC = 8.624%