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You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt,...

You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 12.00%. The firm will not be issuing any new stock. What is its WACC?

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Expert Solution

WACC = (Weight of common stock * Cost of common equity) + (Weight of preferred stock * Cost of preferred stock) + [Weight of debt * After-tax cost of debt]

WACC = (0.45 * 0.12) + (0.15 * 0.0750) + [0.40 * 0.06]

WACC = 0.0893 or 8.93%

jeff jeffy answered 2 years ago
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