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 25 percent debt, 19 percent preferred stock, and 56 percent common stock. If the returns required by investors are 8 percent, 12 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

Percentage Investment (a) Required Return (b) After tax Return (b - tax)= c (a )* ( c) Debt 25% 8% 4.80% 1.20% Preferred Stock 19% 12% 12% 2.28% Common Stock 26% 15% 15% 3.90% WACC 7.38% WACC = 7.38%

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