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 23 percent debt, 1 percent preferred stock, and 76 percent common stock. If the returns required by investors are 9 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%.)

After tax WACC

Explanation / Answer

After tax cost of debt=9(1-0.4)=5.4%

after-tax WACC=Respective costs*Respective weights

=(0.23*5.4)+(0.01*10)+(0.76*15)

=12.74%

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