Suppose that B2B, Inc., has a capital structure of 35 percent equity, 16 percent preferred stock, and 49 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 14.5 percent, 11.0 percent, and 9.5 percent, respectively. What is B2B's WACC if the firm faces an average tax rate of 30 percent?

Question

Business

Kenya Sims

1 November, 01:43

Suppose that B2B, Inc., has a capital structure of 35 percent equity, 16 percent preferred stock, and 49 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 14.5 percent, 11.0 percent, and 9.5 percent, respectively. What is B2B's WACC if the firm faces an average tax rate of 30 percent?

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Sadie Little · Answer 1

10.0935% or 10.09%

Explanation:

Weighted average cost of capital = We*Ke + Wd*Kd (1-T) * Wp*Kp

We = 35%

Ke = 14.5%

Wd = 49%

Kd * (1-Tax rate) = 9.5% (1-0.30) = 9.5%*0.70 = 6.65%

Wp = 16%

Kp = 11%

WACC = 0.35*14.5% + 0.49*6.65%+0.16*11%

= 5.075%+3.2585%+1.76%

= 10.0935% or 10.09%