Question

Suppose that B2B, Inc. has a capital structure of 35 percent equity, 16 percent preferred stock, and 49 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 14.0 percent, 10.0 percent, and 9.0 percent, respectively.

What is B2B’s WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield?

Answer 1

Cost of debt after tax = (9)(1 – tax rate)

= (9) (1 –0.21)

= 7.11%

WACC = Respective cost x Respective weight

= (0.35)(14) + (0.16)(10) +(0.49)(7.11)

= 9.9839%

= 9.98% (Approx.)

Explanation: Referred to the solution above