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, 17 percent preferred stock, and 61 percent common stock. If the returns required by investors are 10 percent, 12 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%.) After tax WACC = %

Explanation / Answer

Answer Calculation of WACC Sl. no. Particulars Weight Cost Weight * Cost 1 Common Stock 61% 17% 10.3700% 2 Preferred Stock 17% 12% 2.0400% 3 Debt 22% 6% 1.3200% Total ----------------- ----------------- 100% 13.73% '---------------- '---------------- WACC = 13.73% Working Notes Debt cost '= rd(1-tax rate) =10*(1-0.40) =6.00%

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