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.

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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 1 year ago

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