Question

Reactive Power Generation has the following capital structure. Its corporate tax rate is 40%. Security Market Value Required Rate of Return Debt $ 30 million 4 % Preferred stock 30 million 6 Common stock 40 million 10 What is its WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

The WACC is 6.52%

Step-by-step explanation:

The formula to compute WACC is shown below:

= Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of common stock) × (cost of common stock)

where,

Weighted of debt = Debt ÷ total firm

The total firm includes debt, preferred stock, and the equity which equals to

= $30 million + $30 million + $40 million

= $100 million

So, Weighted of debt = ($30 million ÷ $100 million) =0.3

So, the weight of preferred stock = (Preferred stock ÷ total firm)

= $30 million ÷ $100 million

= 0.3

And, the weighted of common stock = (Common stock ÷ total firm)

= $40 million ÷ $100 million

= 0.4

Now put these values to the above formula

So, the value would equal to

= (0.3 × 4%) × ( 1 - 40%) + (0.3 × 6%) + (0.4 × 10%)

= 0.72% + 1.8% + 4%

= 6.52%