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 30 percent debt, 3 percent preferred stock, and 67 percent common stock. If the returns required by investors are 10 percent, 13 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

wt of debt=30% wt of prefered stock=3% wt of common stock=67%

return for debt=6%, return for prefered stock=13% , return for common stock=15%

Tax =40%

Cost of debt=return on debt*(1- tax rate) =6%*(1-40%)= 3.6%

Cost of prefered stock=13%

cost of common stock=15%

WACC= (wt of debt*Cost of debt)+(wt of prefered stock*Cost of prefered stock)+(wt of common stock*cost of common stock)

=(30%*3.6%)+(3%*13%)+(67%*15%)=11.52%

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