Targaryen Corporation has a target capital structure of 75 percent common stock.

Question

Targaryen Corporation has a target capital structure of 75 percent common stock. o percent preferred stock, and 15 percent debt Its cost of equity is t1 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 6 percent The relevant tax rate is 23 percent. a. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e-g. 3216.) What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as o percent rounded to 2 decimal places, e.g. 3216,) b. a. WACC b. Cost of debt

Explanation / Answer

a)

WACC = Weight of common stock * cost of equity + weight of debt * after tax cost of debt + weight of preferred stock * cost of preferred stock

WACC = 0.75*0.11 + 0.15*0.06*(1 - 0.23) + 0.1*0.05

WACC = 0.0825 + 0.00693 + 0.005

WACC = 0.0944 or 9.44%

b)

After tax cost of debt = Pre tax cost of debt ( 1 - tax)

After tax cost of debt = 0.06 ( 1 - 0.23)

After tax cost of debt = 0.0462 or 4.62%

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