You were hired as a consultant to Protec Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 5.00%, the cost of preferred is 7.0%, and the cost of retained earnings is 11.50%. The firm will not be issuing any new stock. What is its WACC? 6.75% 7.18% 7.64% 7.93% 8.23%

Question

Jerimiah Mora

Business

24 July, 15:39

You were hired as a consultant to Protec Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 5.00%, the cost of preferred is 7.0%, and the cost of retained earnings is 11.50%. The firm will not be issuing any new stock. What is its WACC? 6.75% 7.18% 7.64% 7.93% 8.23%

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Nathan Lopez · Answer 1

8.23%

Explanation:

WACC is the average cost of capital of the firm based on the weightage of the debt and weightage of the equity multiplied to their respective costs.

According to WACC formula

WACC = (Cost of common stock x Weightage of common stock) + (Cost of preferred stock x Weightage of preferred stock) + (Cost of debt (1 - t) x Weightage of debt)

As cost of debt is already given in after tax rate, so there is no need to used tax factor in the formula. Placing value in the formula,

WACC = (11.5% x 45%) + (7% x 15%) + (5% x 40%)

WACC = 5.175% + 1.05% + 2% = 8.225% = 8.23% (rounded off)