Question

Ninecent Corporation has a target capital structure of 65 percent common stock, 10 percent preferred stock, and 25 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 7 percent, and the pretax cost of debt is 8 percent. The relevant tax rate is 23 percent. What is the company’s WACC? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places.

a) 8.12%
b) 9.45%
c) 10.36%
d) 11.78%

Answer 1

The company's WACC is 9.39%.

We can calculate the WACC using the following formula:

WACC = (E/V x Re) + ((D/V x Rd) x (1 - T))

Re = cost of equity (required rate of return)

Rd = cost of debt (yield to maturity on existing debt)

T = tax rate

In this case, we know the following:

E/V = 65%

D/V = 25%

Re = 11%

Rd = 8%

T = 23%

Now we can plug all of our values into the WACC formula:

WACC = (0.65 x 0.11) + ((0.25 x 0.08) x (1 - 0.23))

= 9.39%.