The effect of tax rate on WACCK. Bell Jewelers wishes to explore the effect on i

Question

The effect of tax rate on WACCK. Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 3535% debt, 1010% preferred stock, and 55 %55% common stock. The cost of financing with retained earnings is 1111%, the cost of preferred stock financing is 1212%, and the before-tax cost of debt financing is 88%. Calculate the weighted average cost of capital (WACC) given a tax rate of 30%.

The firm's WACC is ____%. (Round to two decimal places.)

Explanation / Answer

Weight of Debt = 35%
Weight of Preferred Stock = 10%
weight of Common Stock = 55%
Pretax Cost of debt = 8%
Cost of Preferred Stock = 12%
Cost of Retained Earnings = 11%
Tax Rate = 30%

WACC = Weight of Debt * Pretax Cost of debt * (1 - tax) + Weight of Preferred Stock * Cost of Preferred Stock + weight of Common Stock * Cost of Retained Earnings
WACC = 35% * 8% * (1 - 0.30) + 10% * 12% + 55% * 11%
WACC = 9.21%

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