Please see chart below. I feel like WACC of 11.90 is wrong. Where is the 5.5% \"

Question

Please see chart below. I feel like WACC of 11.90 is wrong. Where is the 5.5% "cost of debt before tax" coming from? If from equity because it is taxable, how would it be calculated? Also, It seems like the calculation is incomplete. would WAAC be 11.9% x 5.5% x 1-.3? Is WAAC really 4.58%?

How do you find the WACC?

Statement showing computation of WACC Particulars Weight Cost of Capital Weighted Cost of capital Equity or common stock 0.5500 18.000% 9.90% Preferred Stock 0.0500 9.200% 0.46% Debt 0.4000 3.85% 1.54%                                1.00 11.90% Thus WACC is 11.90% Cost of debt before tax 5.5% Tax Rate 30% Cost of debt after tax(5.5(1-.3) 3.85%

Explanation / Answer

Dear Student - I will answer your quesrier one by one Where is the 5.5% "cost of debt before tax" coming from - We always compute cost of debt after tax since if we have not paid interest on debt then it would be our income and we would have received it after tax. Thus Actual cost of debt is after tax To compute WACC we multiply cost of debt, Equity and prefence stock by their respective weights WACC is weighted average cost of capital which itself specifies that it should be computed on the basis of weights. Weighted Cost of Equity = .55*18% 9.90% Weighted Cost of Preference = .05*9.2% 0.46% Weighted Cost of debt = .40*3.85% 1.54% Adding all the 3 weighted average we will find WACC = 9.90% + .46% + 1.54% = 11.90% I hope I had made myself clear.Please revert in case more details are required Statement showing computation of WACC Particulars Weight Cost of Capital Weighted Cost of capital = Weight*Cost of Capital Equity or common stock 0.5500 18.000% 9.90% Preferred Stock 0.0500 9.200% 0.46% Debt 0.4000 3.85% 1.54%                1.00 11.90% Thus WACC is 11.90% Cost of debt before tax 5.5% Tax Rate 30% Cost of debt after tax(5.5(1-.3) 3.85%

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.