2. Reactive Power Generation has the following capital structure. Its corporate tax rate is 21%. What...

2. Reactive Power Generation has the following capital structure. Its corporate tax rate is 21%. What is its Weighted Average Cost of Capital (WACC)?

Security Market Value Required Rate of Return Debt

debt $20 million 6%

preference stock $10 million 8%

common stock $50 million 12%

Expert Solution

WACC is 9.69%

Step-1:Calculation of weight of each component of capital

Market Value of:

Debt	=	20
Preferred Stock	=	10
Common Stock	=	50

Total		80

So, Weight of:

Debt	=	20	/	80	=	0.250
Preferred Stock	=	10	/	80	=	0.125
Common Stock	=	50	/	80	=	0.625

Total

After tax cost of debt	=	Before tax cost of debt*(1-Tax rate)
	=	6%*(1-0.21)
	=	4.74%


Step-2:Calculation of WACC

		Weight	Cost	Weighted Cost
		a	b	c=a*b
Debt		0.250	4.74%	1.19%
Preferred Stock	0.125	8%	1.00%
Common Stock	0.625	12%	7.50%

Total				9.69%

jeff jeffy answered 2 years ago

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