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You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 12.75%. The firm will not be issuing any new stock. What is its WACC?

Answer :

Answer:

Weighted Average Cost of Capital = 9.25

Explanation:

given data

Weight of debt = 40%

Weight of Preferred = 15%

Weight of equity = 45%

Cost of debt = 6%

Cost of Preferred = 7.50%

Cost of equity or retained earnings = 12.75%

solution

we get here Weighted Average Cost of Capital that is express as

Weighted Average Cost of Capital = (Cost of debt × Weight of debt) + (Cost of Preferred × Weight of Preferred) + ( Cost of equity × weight of equity)  .............1

put here value and we will get

Weighted Average Cost of Capital = (6% × 40%) + (7.5% × 15%) + (12.75% × 45%)

Weighted Average Cost of Capital = 0.092625

Weighted Average Cost of Capital = 9.25

The WACC is 9.25%.

Calculation of the weighted average cost of capital:

Since we know that

Weighted Average Cost of Capital = (Cost of debt × Weight of debt) + (Cost of Preferred × Weight of Preferred) + ( Cost of equity × weight of equity)  

So,

= (6% × 40%) + (7.5% × 15%) + (12.75% × 45%)

= 0.092625

= 9.25

Hence, The WACC is 9.25%.

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