Question

Shi Importers' balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi's tax rate is 40%, rd = 7%, rps = 5.8%, and rs = 14%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC? Round your answer to two decimal places

Answer 1

WACC is 10.65%

Explanation

Given

Debt $300 million

$50 million preferred stock

$250 million common stock

tax 40%,

rd 7% cost of debt

rps 5.8 cost of preferred stock

rs 14% cost of common stock

W are also given the relevant weights for target capital structure

WACC is the weighted sum of the company's cost of financing throught debt or equity

WACC = Wd*rd(1-tc)+ We *Re

Equity in Shi's importer is divided in to two

SO WACC = 0.30*0.07(1-0.4) + 0.05*0.058 + 0.65 *0.14

=0.1065/10.65%

Answer 2

The WACC can be calculated as below;

Step-by-step explanation:

WACC=E*rs+D*rd+D2*rps/(E+D+D2)

Where E=$250 million

rs=14%

D=$300 million

rd=7%

D2=$50 million

rps=5.8%

Now putting above values in the given formula we get;

WACC=250*14%+300*7%+50*5.8%/(250+300+50)

WACC=$58.9 million/$ 600 million

WACC=9.82%