Industries' capital structure features 63 percent equity, 7 percent preferred stock, and 30 percent debt. If the before-tax component costs of equity, preferred stock, and debt are 11.60 percent, 9.5 percent, and 9 percent, respectively, what is MNINK's WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield?

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Business

Timmy

26 July, 09:08

Industries' capital structure features 63 percent equity, 7 percent preferred stock, and 30 percent debt. If the before-tax component costs of equity, preferred stock, and debt are 11.60 percent, 9.5 percent, and 9 percent, respectively, what is MNINK's WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield?

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Libby Maddox · Answer 1

16.091%

Explanation:

The computation of the WACC is shown below:

= (Weightage of debt * cost of debt) * (1 - tax rate) + (Weightage of preferred stock) * (cost of preferred stock) + (Weightage of common stock) * (cost of common stock)

= (0.3 * 9%) * (1 - 21%) + (0.07 * 9.5%) + (0.63 * 11.60%)

= 2.133% + 6.65% + 7.308%

= 16.091%

Basically we multiplied the weightage with its cost