Question

Targaryen Corporation has a target capital structure of 75 percent common stock, 10 percent preferred stock, and 15 percent debt. Its cost of equity is 10 percent, the cost of preferred stock is 6 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 22 percent.

Answer 1

a. 8.92%

b. 5.46%

Step-by-step explanation:

a. What is the company’s WACC

b. What is the aftertax cost of debt?

a. After tax cost of debt = 7%*(1-tax rate)

=0.07*(1-0.22)

= 0.07 * 0.78

= 0.0546

= 5.46%

Thus, WACC =Respective costs*Respective weight

WACC = (0.75*10)+(0.1*6)+(0.15*5.46)

WACC = 8.919%

WACC = 8.92%

b. The After tax cost of debt from above is = 5.46%