Question

Baxter Inc. has a target capital structure of $30 million debt, $15 million preferred stock, and $55 million 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

Answer 1

12%

Step-by-step explanation:

Weighted Average Cost of Capital = Weight of Equity * Cost of Equity + Weight of Preferred Stock * Cost of Preferred Stock + Weight of Debt * Cost of Debt

Particluars Weights (given) Cost Weights*Cost

Common stock 55% or 0.55 16% = 8.8 %

Debt 30 % or 0.30 7% (after tax) = 2.1 %

Preferred Stock 15 % or 0.15 7.15 % = 1.0725 %

WACC 12 %