Question

Targaryen 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.1. What is the company's WACC?2. What is the aftertax cost of debt?

Answer 1

1. 8.41 %

2.4.62 %

Step-by-step explanation:

Weighted Average Cost of Capital (WACC) is the cost of capital for all company projects.It shows the risk of the company.

WACC = Ke×(E/V) + Kp×(P/V) + Kd×(D/V)

= 0.10 × 70% + 0.05 × 5% + 0.06 × 77%× 25%

= 8.405 or 8.41 %

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

= 0.06 × (1 - 0.23)

= 4.62 %