Question

Suppose that B2B, Inc. has a capital structure of 37 percent equity, 17 percent preferred stock, and 46 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 14.5 percent, 11 percent, and 9.5 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? (Round your answer to 2 decimal places.)

Answer 1

To calculate B2B, Inc.'s WACC, we use the WACC formula and incorporate the given capital structure percentages, component costs, and tax rate. After substituting the values into the formula, we find that the WACC for B2B, Inc. is 10.69%.

Step-by-step explanation:

To calculate the weighted average cost of capital (WACC) for B2B, Inc., we need to take into account the proportions of equity, preferred stock, and debt in the capital structure as well as their respective costs and tax impact. The formula for WACC is:

WACC = (E/V) * Ke + (P/V) * Kp + (D/V) * Kd * (1-Tc)

where:

• E/V is the proportion of equity to the value of the firm.
• P/V is the proportion of preferred stock to the value of the firm.
• D/V is the proportion of debt to the value of the firm.
• Ke is the cost of equity.
• Kp is the cost of preferred stock.
• Kd is the before-tax cost of debt.
• Tc is the corporate tax rate.

Using the given data:

1. E/V = 37%
2. P/V = 17%
3. D/V = 46%
4. Ke = 14.5%
5. Kp = 11%
6. Kd = 9.5%
7. Tc = 21%

Substitute the values into the WACC formula:

WACC = (0.37 * 0.145) + (0.17 * 0.11) + (0.46 * 0.095 * (1 - 0.21))

WACC = 0.05365 + 0.0187 + 0.034567

WACC = 0.106917 or 10.69% when rounded to two decimal places.

The firm's WACC, accounting for the interest tax shield, is 10.69%.