Question

Kellog’s CFO is in the process of determing the firm’s WACC. The information he collected from the balance sheet and the capital markets, as well as his estimates of the cost of the compnomnet of capital is presented in the following table. Please help him to estimate the WACC of the firm . The company is facing a tax rate of 35%

Show work and calculations

Component	Book Value	Number Outstaning	Current market price	Component cost
Debt	150,000,000	150,000	1,075	7.6%
Preferred stocks	45,000,000	1,500,000	40	10.53
Common Stocks	190,000,000	4,500,000	45.57	11.36%

Answer 1

After tax rate = YTM * (1-Tax rate)

After tax rate = 7.6 * (1-0.35)

After tax rate = 4.94

Total Capital value = price of debt*Shares of debt + price of preferred equity*Shares of preferred equity + price of common stock*Shares of common stock

=1075*150000+40*1500000+45.57*4500000

=426315000

Weight of debt = price of debt*Shares of debt/Total Capital Value

= 161250000/426315000

=0.3782

Weight of preferred equity = price of preferred equity*Shares of preferred equity/Total Capital Value

= 60000000/426315000

=0.1407

Weight of common stock = price of common stock*Shares of common stock/Total Capital Value

= 205065000/426315000

=0.481

Cost of of Capital = Weight of debt*Cost of of debt+Weight of preferred equity*Cost of of preferred equity+Weight of common stock*Cost of of common stock

Cost of of Capital = 4.94*0.3782+10.53*0.1407+11.36*0.481

Cost of of Capital = 8.8149