Question

Cream and Crimson Foods has a target capital structure of calling for 45.00 percent debt, 4.00 percent preferred stock, and 51.00 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 10.41%. Its cost of common equity is 12.38%. Find the WACC for Cream and Crimson Foods

Answer 1

9.9578%

Step-by-step explanation:

Solution

Given that:

Cream and Crimson foods target a structure capital of calling =5.00%

Stock preferred = 4%

Common equity = 51.00%

Before tax-cost = 12.00%

Rate of tax= 40.00%

preferred stock cost = 10.41%

Now,

After-tax cost of debt=12*(1-tax rate)

=12*(1-0.4)=7.2%

Thus,

The WACC=Respective costs*Respective weight

=(0.45*7.2)+(0.04*10.1)+(0.51*12.38)

=9.9578%

Therefore, the WACC for Cream and Crimson Food is 9.9578%

Answer 2

9.9702%

Step-by-step explanation:

After-tax cost of debt=12*(1-tax rate)

= 12* (1-0.4) =7.2%

WACC=Respective cost*Respective weight

=(7.2×0.45)+(10.41×0.04)+(12.38×0.51)

=9.9702%