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 27  percent debt, 10   percent preferred stock, and 63  percent common stock. If the returns required by investors are 11  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 27  percent debt, 10   percent preferred stock, and 63  percent common stock. If the returns required by investors are 11  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 27 percent debt, 10 percent preferred stock, and 63 percent common stock. If the returns required by investors are 11 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:

After Tax WACC = Cost of Debt*(1-Tax Rate)*Weight of Debt + Cost of Preferred Stock*Weight of Preferred Stock + Cost of Equity*Weight of Equity

After Tax WACC = 11*(1-.40)*.27 + 13*.10 + 17*.63 = 13.79%

Answer is 13.79%.

Thanks.

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