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The capital structure for the Carion Corporation is provided​ here:    Bonds 1,146 Preferred stock   268...

The capital structure for the Carion Corporation is provided​ here:

  
Bonds 1,146
Preferred stock   268
Common stock   3,791

---------
5,205

The company plans to maintain its debt structure in the future. If the firm has an​ after-tax cost of debt of 4.9 ​percent, a cost of preferred stock of 13.9 ​percent, and a cost of common stock of 18.5 ​percent, what is the​ firm's weighted average cost of​ capital?

Solutions

Expert Solution

Weight of debt in the capital structure= $1,146/ $5,205*100

                                                                          = 0.2202*100

                                                                          = 22.02%

Weight of equity in the capital structure= $3,791/ $5,205*100

                                                                             = 0.7283*100

                                                                             = 72.83%

Weight of preference shares in the capital structure= $268/ $5,205*100

                                                                                                    = 0.0515*100

                                                                                                    = 5.15%

The weighted average cost of capital is calculated using the below formula:

WACC=Wd*Kd(1-t)+Wps*Kps+We*Ke

where:

Wd= Percentage of debt in the capital structure.

Kd= The before tax cost of debt

Wps= Percentage of preferred stock in the capital structure

Kps=Cost of preferred stock

We=Percentage of equity in the capital structure

Ke= The cost of common equity.

T= Tax rate

WACC= 0.2202*4.9% + 0.0515*13.9% + 0.7283*18.5%

            = 1.0790% + 0.7159% + 13.4736%

            = 15.2685%      15.27%.

In case of any query, kindly comment on the solution.

jeff jeffy answered 1 year ago
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