Question

Shi Import-Export's balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi's tax rate is 30%, rd = 6%, rps = 7.3%, and rs = 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC? Round your answer to two decimal places.

Answer= __%

Answer 1

The weighted average cost of capital (WACC) for Shi Import-Export is 9.97%.

Step-by-step explanation:

To calculate the weighted average cost of capital (WACC), we need to calculate the cost of each component of Shi Import-Export's capital structure and weight them by their proportions.

The cost of debt (rd) is given as 6%, the cost of preferred stock (rps) is given as 7.3%, and the cost of common equity (rs) is given as 12%. We also know the target proportions are 30% debt, 5% preferred stock, and 65% common stock.

Using these inputs, we can calculate the WACC using the formula: WACC = (weight of debt * cost of debt) + (weight of preferred stock * cost of preferred stock) + (weight of common equity * cost of common equity).

Plugging in the values, we get: WACC = (0.3 * 0.06) + (0.05 * 0.073) + (0.65 * 0.12) = 0.018 + 0.00365 + 0.078 = 0.09965, or 9.97% (rounded to two decimal places).