Question

argaryen Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Its cost of equity is 10 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 23 percent.a. What is the company’s WACC?

Answer 1

WACC = 8.41%

Step-by-step explanation:

The weighted Average cost of Capital is the average cost of capital for the different sources of long-term capital available to a firm weighted according to the proportion each source of finance bears to the total capital in the pool..

After-tax cost of debt = (1- tax rate) × before tax cost of debt

= (1-0.23)× 6% = 4.6%

Type Cost (%) Weight cost × weight

Equity 10 70 7

Preferred stock 5 5 0.25

Debt 4.6% 25 1.155

Total 100 8.405

WACC = 8.405 / 100 × 100 = 8.41%

WACC = 8.41%