Question

You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% 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 12.00%. The firm will not be issuing any new stock. What is its WACC?

a. 8.93%
b. 6.69%
c. 6.96%
d. 7.68%
e. 7.59%

Answer 1

WACC = Ke(E/v) + kp(P/V) + Kd(D/V)

WACC = 12(45/100) + 7.5(15/100) + 6(40/100)

WACC = 5.4 + 1.125 + 2.4

WACC = 8.93%

Step-by-step explanation:

Weighted average cost of capital is a function of each cost of capital multiplied by the proportion of each source of capital in the capital structure. Ke denotes cost of equity, kp is cost of preferred stock and kd represents cost of debt.