Capital Co. has a capital structure, based on current market values, that consis

Question

Capital Co. has a capital structure, based on current market values, that consists of 28 percent debt, 17 percent preferred stock, and 55 percent common stock. If the returns required by investors are 10 percent, 11 percent, and 19 percent for the debt, preferred stock, and common stock, respectively, what is Capitals after-tax WACC? Assume that the firms marginal tax rate is 40 percent. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

Explanation / Answer

Hi,

Please find the detailed answer as follows:

WACC = Cost of Debt*(1-Tax Rate)*Weight of Debt + Cost of Preferred Stock*Weight of Preferred Stock + Cost of Equity*Weight of Equity = 10*(1-.40)*.28 + 11*.17 + 19*.55 = 14%

Answer is 14%.

Thanks.

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