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 24 percent debt, 20 percent preferred stock, and 56 percent common stock. If the returns required by investors are 8 percent, 12 percent, and 15 percent for the debt, preferred stock, and common stock, respectively, what is Capital’s after-tax WACC? Assume that the firm’s 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

WACC = rD (1- Tc )*( D / V )+ rE *( E / V ) + rP*( P / V )

Where...

rD = The required return of the firm's Debt financing
(1-Tc) = The Tax adjustment for interest expense
(D/V) = (Debt/Total Value)
rE= the firm's cost of equity
(E/V) = (Equity/Total Value)

rP = Firm's cost of preferred stock

(P/V) = (Preferred stock/Total value)

WACC = 0.24*0.08*(1-0.4) + 0.2*0.12 + 0.56*0.15 = 0.11952

WACC = 11.952% = 11.95%

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