Suppose that B2B, Inc., has a capital structure of 35 percent equity, 16 percent preferred stock, and 49 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 14.5 percent, 11.0 percent, and 9.5 percent, respectively. What is B2B's WACC if the firm faces an average tax rate of 30 percent?

Question

Messiah Whitney

Business

18 September, 10:38

Suppose that B2B, Inc., has a capital structure of 35 percent equity, 16 percent preferred stock, and 49 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 14.5 percent, 11.0 percent, and 9.5 percent, respectively. What is B2B's WACC if the firm faces an average tax rate of 30 percent?

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Answers (1)

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Bentley Conrad · Answer 1

10.0935% or 10.09%

Explanation:

Weighted average cost of capital = We*Ke + Wd*Kd (1-T) * Wp*Kp

We = 35%

Ke = 14.5%

Wd = 49%

Kd * (1-Tax rate) = 9.5% (1-0.30) = 9.5%*0.70 = 6.65%

Wp = 16%

Kp = 11%

WACC = 0.35*14.5% + 0.49*6.65%+0.16*11%

= 5.075%+3.2585%+1.76%

= 10.0935% or 10.09%