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Ebling Inc. finances with 0.2 fraction debt, 0.1 fraction preferred and the remaining common stock. Ebeling's...

Ebling Inc. finances with 0.2 fraction debt, 0.1 fraction preferred and the remaining common stock. Ebeling's before-tax cost of debt is 0.05, it cost of preferred stock is 0.12, and its cost of common stock is 0.16. 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

WACC = Cost of Equity * Equity% + Cost of Debt (1 - Tax Rate) * Debt% + Cost of Preferred Stock * Preferred Stock%

= (0.16 * 0.7) + (0.05 * (1 - 0.3) * 0.2) + (0.12 * 0.1)

= 0.112 + 0.007 + 0.012

= 0.131

WACC = 13.10%

jeff jeffy answered 2 years ago
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