Question
In: Finance
Ebling Inc finances with 0.2 fraction debt, 0.1 fraction preferred and the remaining common stock. If...
Ebling Inc finances with 0.2 fraction debt, 0.1 fraction preferred and the remaining common stock. If Ebeling is subject to a 0.3 fraction corporate income tax, what is the company's Weighted Average Cost of Capital.
Solutions
Expert Solution
We don’t have information about cost of each capital. We only have information about respective weights and corporate tax rate.
Weighted Average Cost of Capital = WACC
Cost of preferred share = Rp
Weight of preferred share = 0.1
Cost of debt = Rd
Weight of debt = 0.2
Tax rate = 0.3
Cost of equity = Re
Weight of equity = 1 - Weight of debt - Weight of preference = 1-0.2-0.1 = 0.7
Now,
WACC = Re x 0.7 + Rp x 0.1 + Rd x 0.2 x (1-0.3)
WACC = 0.7 Re + 0.1 Rp + 0.14 Rd
---------
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Note: Above is equation will form with given information. Please replace the variables for each cost portion to get exact WACC number.
Example (strictly for your understanding I am using numeric values for each cost)
Suppose if each cost of capital is 10% then:
WACC = 0.7 x 10% + 0.1 x 10% + 0.14 x 10%
WACC = 9.40%
jeff jeffy answered 2 years agoRelated Solutions
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Preferred Stock: 8,500 shares of preferred stock selling at
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Need answer not in Chegg Database and source.
(WACC) A company has common stock, preferred shares, and debt outstanding. As of today, the common...
(WACC) A company has common stock, preferred shares, and debt
outstanding. As of today, the common stock is valued at $10 per
share, with 2 million shares outstanding. It has a beta of 5, and
market return is estimated to be 4% while treasury bills offer 1.5%
risk-free rate. The preferred stock is valued at $15 per share,
which pays dividend of $2 each year at a constant growth rate of
3%. Preferred stocks have 5 million shares outstanding. Finally,...
(WACC) A company has common stock, preferred shares, and debt outstanding. As of today, the common...
(WACC) A company has common stock, preferred shares, and debt
outstanding. As of today, the common stock is valued at $10 per
share, with 2 million shares outstanding. It has a beta of 5, and
market return is estimated to be 4% while treasury bills offer 1.5%
risk-free rate. The preferred stock is valued at $15 per share,
which pays dividend of $2 each year at a constant growth rate of
3%. Preferred stocks have 5 million shares outstanding. Finally,...
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The
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and common equity. Would the WACC be different if the equity for
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