Question

Pfd Company has debt with a yield to maturity of 7.1 %​, a cost of equity of 15.4 %​, and a cost of preferred stock of 8.9 %. The market values of its​ debt, preferred​ stock, and equity are $ 9.9 ​million, $ 2.9 ​million, and $ 13.9 ​million, respectively, and its tax rate is 40 %. What is this​ firm's after-tax​ WACC? ​Note: Assume that the firm will always be able to utilize its full interest tax shield.

Answer 1

After-tax WACC is 10.56%

Step-by-step explanation:

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

Ke is the cost of equity at 15.4%

Kd is the cost of debt of 7.1%

Kp is the cost of preferred stock of 8.9%

E is the value of equity at $13.9 million

D is the value of debt at $9.9 million

P is the value of preferred stock at $2.9 million

V=E+D+P

V is the total finance available calculated below:

V=$13.9+$9.9+$2.9=$26.7 million

tax rate at 40% or 0.4

WACC=(15.4%*13.9/26.7)+(7.1%*9.9/26.7*(1-0.4))+(8.9%*2.9/26.7)

WACC=(15.4%*13.9/26.7)+(7.1%*9.9/26.7*0.6)+(8.9%*2.9/26.7)

WACC=10.56%