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 20 percent debt, 1 percent preferred stock, and 79 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

WACC Post tax = Cost of Equity + Cost of Debt (1-tax) + Cost of Prfered Stock

= [15% x 0.79] + [8% (1-0.40) x 0.20] + [10% x 0.01]

= 12.91%

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