Question

Rogers' Rotors has debt with a market value of $250,000, preferred stock with a market value of $50,000, and common stock with a market value of $750,000. If debt has a cost of 7%, preferred stock a cost of 9%, common stock a cost of 13%, and the firm has a tax rate of 30%, what is the WACC?

Answer 1

10.88%

Step-by-step explanation:

The computation of the weighted average cost of capital is shown below:

But before that first we have to determine the after tax cost of debt and the total value which is shown below:

After tax cost of debt is

=7% × (1 - tax rate)

= 7% × (1 - 0.3)

= 4.9%

And,

Total value is

= $250,000 + $50,000 + $750,000

= $1,050,000

Now WACC is

WACC = Respective costs × Respective weights

= ($250,000 ÷ 1050000 × 4.9%) + ($50,000 ÷ $1,050,000 × 9)+($750,000 ÷ $1,050,000 × 13%)

= 10.88%

We simply applied the above formula