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 22 percent debt, 1 percent preferred stock, and 77 percent common stock. If the returns required by investors are 9 percent, 11 percent, and 15 percent for the debt, preferred stock, and common stock, respectively, what is Capital

Capital Co. has a capital structure, based on current market values, that consists of 22 percent debt, 1 percent preferred stock, and 77 percent common stock. If the returns required by investors are 9 percent, 11 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.

Explanation / Answer

WACC = 0.22 * 9% * (1- 0.4) + 0.01 * 11% + 0.77 * 15%

= 12.848%

= 12.85%

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