Question

Cream and Crimson Foods has a target capital structure of calling for 41.00 percent debt, 5.00 percent preferred stock, and 54.00 percent common equity (retained earnings plus common stock). Its before-tax cost of debt is 12.00 percent. The tax rate is 40.00%. Its cost of preferred stock is 12.98%. Its cost of common equity is 13.18%. Find the WACC for Cream and Crimson Foods

Answer 1

10.72%

Step-by-step explanation:

WACC = (weight of equity x cost of equity) + [weight of debt x cost of debt x (1 - tax rate)] +( weight of preferred stock x cost of preferred stock)

debt = 0.41 x 12% x (1 - 0.4) = 2.95%

preferred stock = 0.05 x 12.98% = 0.65%

common equity = 0.54 x 13.18% = 7.12%

WACC = 2.95% + 0.65% + 7.12% = 10.72%