Question

Baxter Inc. has a target capital structure of 30% debt, 15% preferred stock, and 55% common equity. The company's after-tax cost of debt is 7%, its cost of preferred stock is 11%, its cost of retained earnings is 15%, and its cost of new common stock is 16%. The company stock has a beta of 1.5 and the company's marginal tax rate is 35%. What is the company's weighted average cost of capital if retained earnings are used to fund the common equity portion?A) 11.20%B) 12.00%C) 13.80%D) 14.45%

Answer 1

B) WACC 12.00000%

Step-by-step explanation:

`WACC = K_e((E)/(E+P+D)) + K_p((P)/(E+P+D)) + K_d(1-t)((D)/(E+P+D))`

Ke 0.15 (we are asked for the WACC if retained earnings are used, so we ould assing RE rate

Equity weight 0.55

Kp 0.11

Preferred Weight 0.2

Kd(1-t) (after-tax debt) 0.07

Debt Weight 0.3

`WACC = 0.15(0.55) + 0.11(0.15) + 0.07(0.3)`

WACC 12.00000%