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linda_us
linda_us, Master's Degree
Category: Business and Finance Homework
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Estimating the WACC with three sources of capital) Research

Resolved Question:

Estimating the WACC with three sources of capital) Research Department has the capital
structure given here. If tax rate is 30%, what is its WACC?

BOOK VALUE MARKET VALUE BEFORE-TAX COST
Bonds $1,000 $1,000 8%
Preferred stock 400 300 9%
Common stock 600 1,700 14%
Submitted: 6 years ago.
Category: Business and Finance Homework
Expert:  linda_us replied 6 years ago.
Hi JACUSTOMER

WACC =

Weight of Debt* BEFORE-TAX COST*(1-Tax Rate)

+ Weight of Preferred stock * BEFORE-TAX COST

+ Weight of Common stock * BEFORE-TAX COST

WACC

= 1000/(1000+300+1700)*8*(1-.30) + 300/(1000+300+1700)*9 + 1700/(1000+300+1700)*14

=10.70%

Please Note: Market Value is used as weight.

Regards

Linda

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