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 31 percent debt, 7   percent preferred stock, and 62 percent common stock. If the returns required by investors are 8 percent, 11   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 31 percent debt, 7 percent preferred stock, and 62 percent common stock. If the returns required by investors are 8 percent, 11 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. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

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)*.31 + 11*.07 + 17*.62 = 12.798% or 12.80%

Answer is 12.80%

Thanks.

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