Rogue Drafting has debt with a market value of $450,000, preferred stock with a market value of $150,000, and common stock with a market value of $350,000. If debt has a cost of 8%, preferred stock a cost of 10%, common stock a cost of 12%, and the firm has a tax rate of 30%, what is the WACC?

Question

Business

Macho

28 January, 04:09

Rogue Drafting has debt with a market value of $450,000, preferred stock with a market value of $150,000, and common stock with a market value of $350,000. If debt has a cost of 8%, preferred stock a cost of 10%, common stock a cost of 12%, and the firm has a tax rate of 30%, what is the WACC?

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Jace Henson · Answer 1

the WACC is 8.65%.

Explanation:

Total firm capital = $450,000 + $150,000 + $350,000

= $950,000

Weight of debt in the capital structure = $450,000 / $950,000

= 47.37%

Weight of preferred stock in the capital structure

= $150,000 / $950,000

= 15.79%

Weight of common stock in the capital structure

= $350,000 / $950,000

= 36.84%

The weighted average cost of capital is calculated using the below formula:

WACC = Wd*Kd (1 - t) + Wps*Kps + We*Ke

where:

Wd = Percentage of debt in the capital structure.

Kd = The before tax cost of debt

Wps = Percentage of preferred stock in the capital structure

Kps = Cost of preferred stock

We = Percentage of common stock in the capital structure

Ke = The cost of common stock

T = Tax rate

WACC = 47.37%*8% * (1 - 0.30) + 0.1579*10% + 36.84%*12%

= 2.65272% + 1.5790% + 4.4208%

= 8.65252%

Therefore, the WACC is 8.65%.