Question

Company X currently has a capital structure that consists of 40% equity, 20% preferred equity, and 40% of debt. The risk-free rate is 3% and the market risk premium is 8%. The company's equity beta is 1.1. The dividend yield for the preferred equity is 6%. The corporate tax rate is 21%, and the cost of borrowing for company X is 5%. What is the WACC for company X

Answer 1

14.58%

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 equity x dividend yield

According to the capital asset price model: Expected rate of return = risk free + beta x (market rate of return - risk free rate of return)

r= 3% + 1.1 x 8 = 11.8

equity = 0.4 x 11.8% = 4.72

d = 0.4 x 5 x (1 -0.21) = 1.58

p = 0.2 x 6 = 1.2

11.8 + 1.58 + 1.2 =