Question

What is the WACC for a company with market values of $4 million for debt and $1 million for preferred shares and $9 million for common stock. The cost of debt is 7%, cost of preferred shares is 11% and the cost of common equity 16%. The corporate tax rate is 35%.

Answer 1

WACC= weight of equity * cost of equity + weight of debt * cost of debt (1- tax ) + weight of preferred shares * cost of preferred shares

Total capital = market value of (equity + debt + preferred shares)

=(9,000,000+4,000,000+1,000,000)= 14,000,000

WACC = 9,000,000/14,000,000 * 16%+ 4,000,000/14,000,000* 7% (1-0.35) + 1,000,000/14,000,000 *11%

=64.285714% *16% + 28.571429% *4.55% + 7.142857% *11%

=10.285714% + 1.300000% + 0.785714%

=12.3714% or 12.37%