Final answer:
The weighted average cost of capital (WACC) for Ninecent Corporation, with its given capital structure and costs, is 8.47% after rounding to two decimal places.
Step-by-step explanation:
To calculate the weighted average cost of capital (WACC) for Ninecent Corporation, we sum the products of the cost of each component of capital (common stock, preferred stock, and debt) and their respective proportions in the company's capital structure. However, for debt, we adjust the cost for the benefit of the tax deductibility of interest expenses.
The formula for WACC includes the following components:
Cost of equity (E/V) × Re
Cost of preferred stock (P/V) × Rp
Cost of debt (D/V) × Rd × (1 - Tc)
Where:
E = market value of equity
P = market value of preferred stock
D = market value of debt
V = E + P + D = total market value of the company's financing (equity + preferred stock + debt)
Re = cost of equity
Rp = cost of preferred stock
Rd = cost of debt
Tc = corporate tax rate
Using the given information:
Weight of common stock = 60%
Weight of preferred stock = 5%
Weight of debt = 35%
Cost of equity (Re) = 11%
Cost of preferred stock (Rp) = 5%
Pretax cost of debt (Rd) = 6%
Tax rate (Tc) = 23%
We can now calculate WACC:
WACC = (0.60 × 11%) + (0.05 × 5%) + (0.35 × 6% × (1 - 0.23))
WACC = (0.60 × 0.11) + (0.05 × 0.05) + (0.35 × 0.06 × 0.77)
WACC = 0.066 + 0.0025 + 0.016185
WACC = 0.084685 or 8.47% (rounded to two decimal places)