K. Bell Jewelers wishes to explore the effect on its cost of capital of the rate

Question

K. Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the The effect of tax rate on WACC company pays taxes. The firm wishes to maintain a capital structure of 30% debt, 10% preferred stock, and 60% common stock. The cost of financing with retained earnings is 15%, the cost of preferred stock financing is 9%, and the before-tax cost of debt financing is 9%. Calculate the weighted average cost of capital (WACC) given a tax rate of 30%. 9. The firm's WACC is %. (Round to two decimal places.)

Explanation / Answer

Weighted Average Cost of Capital = Weight of Debt * Cost of Debt + Weight of Equity * Cost of Equity + Weight of Preferred Stock* Cost of Preferred Stock

= 30% * [ 9% *(1- 30%) ] + 60% * 15% + 10% * 9%

= 11.79%

Hence the correct answer is 11.79%

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