3. Capital Structure Weights Mankiw Inc. has the following abridged balance shee

Question

3. Capital Structure Weights

Mankiw Inc. has the following abridged balance sheet:

Current Assets $3,600 Debt $5,200

Preferred Stock $600

Fixed Assets $6,400 Common Equity $4,200

Total Assets $10,000 Total Liabilities and Equity $10,000

The market value of Mankiw’s debt, preferred stock, and common equity equals its book value. Mankiw’s cost of debt is 10.0%, its cost of preferred stock is 7.7%, and its cost of common equity is 15.2%. If Mankiw’s tax rate is 35%, what is the firm’s WACC?

A. 10.12%

B. 9.89%

C. 10.43%

D. 10.95%

E. 10.23%

Explanation / Answer

WACC= 4200/10000*15.20 +600/10000*7.70 + 5200/10000*10(1-0.35)

=10.226%

E. 10.23%

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