Homework: Homework 10 Score: 0 of 1 pt P 13-15 (similar to) Save 7of1O (6 comple

Question

Homework: Homework 10 Score: 0 of 1 pt P 13-15 (similar to) Save 7of1O (6 complete) HW Score: 60%, 6 of 10 pts Question Help AlCity, Inc., is financed 45% with debt, 5% with prefer ed stock, and 50% with common stock. Its cost of debt is 6.3%, its preferred stock pays an annual di de $2.52 and is priced at S33. It has an equity beta of 1.11 Assume the risk-free rate is 1.6%, the market risk premium is 7% and A City's tax rate is 35%. What is its after-tax WACC? The WACC (Round to two decimal places.)

Explanation / Answer

Cost of preferance shares = Annual dividend/Current price *100 = $2.52/$33 *100 = 7.636%
After tax cost of debt = Before tax cost of debt*(1-T) = 6.3*(1-0.35) = 4.095%
Cost of equity = As per CAPM = Rf+Risk premium*Equity Beta
= 1.6 + 7*1.11
= 1.6+7.77
= 9.37%

WACC = WP* Kp + WD*Kd + WE*Ke
= 0.05*7.636 + 0.45*4.095 + 0.50*9.37
= 0.3818 + 1.84275 + 4.685
= 6.90955 or 6.91%

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.