Question

You were hired as a consultant to Kroncke Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 13.25%. The firm will not be issuing any new stock. What is its WACC?

Answer 1

Weighted Average Cost of Capital is 9.77%

Step-by-step explanation:

Given data

debt D = 40% = 0.40

preferred P = 10% = 0.10

common equity C = 50% = 0.50

cost of debt CD = 6.00% = 0.06

cost of preferred CP = 7.50% = 0.0750

cost of retained earnings CR = 13.25% = 0.1325

to find out

Weighted Average Cost of Capital

solution

we know that Weighted Average Cost of Capital that is

WACC = D× CD + CP ×P + CR ×C

put here all these value we get Weighted Average Cost of Capital

WACC = 0.40 × 0.06 + 0.10 × 0.0750 + 0.50 × 0.1325

Weighted Average Cost of Capital = 0.09775

so Weighted Average Cost of Capital is 9.77%