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 20 percent debt, 16 percent preferred stock, and 64 percent common stock. If the returns required by investors are 8 percent, 13 percent, and 17 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 20 percent debt, 16 percent preferred stock, and 64 percent common stock. If the returns required by investors are 8 percent, 13 percent, and 17 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

Hi,

Please find the 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

WACC = 8*(1-.40)*.20 + 13*.16 + 17*.64 = 13.92%

Thanks.

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