Yamin Co has a target capital structure of 45% debt, 4% preferred stock and 51%

Question

Yamin Co has a target capital structure of 45% debt, 4% preferred stock and 51% common equity. It has before tax cost of debt 11.1% and its cost of preferred stock is 12.2%. if Yasmin can raise all of its equity from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%. a. If it current tax rate is 40% how much higher will Yasmin weighted cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings? b. Yasmin is considering a project that requires an initial investment of $1,708,000. The firm will raise the $1,708,000 in capital by issuing $750,000 of debt at a before tax cost of 11.1%, $78,000 of preferred stock at a cost of 12.2%, and $880,000 of equity at a cost of 14.7%. The firm faces a tax rate of 40% . What will be the WACC for this project?

Explanation / Answer

WACC = 12.05%

WACC = 11.06%

Amount weight cost weight*cost equity                              51.00 0.5100 16.8000% 0.0857 debt                              45.00 0.4500 6.6600% 0.0300 preferred shares                                4.00 0.0400 12.2000% 0.0049

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