10 -13. 11 Capital Co. has a capital structure, based on current market values,

Question

10 -13. 11

Capital Co. has a capital structure, based on current market values, that consists of 31 percent debt, 11 percent preferred stock, and 58 percent common stock. If the returns required by investors are 8 percent, 10 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. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

Explanation / Answer

Sources Proportion Cost of Capital Proportion * Cost of Capital

Debt (31%) 0.31 (8%) 0.08   0.0248

Prefered Stock (11%) 0.11 (10%) 0.10 0.011

Common Stock (58%) 0.58 (15%) 0.15 0.087

Weighted Average Cost of Capital (WACC)- 0.0358

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