ABC Corporation has a target capital structure of
ABC Corporation has a target capital structure of 63 percent common stock, 8 percent preferred stock, and 29 percent debt. Its cost of equity is 13. 3 percent, the cost of preferred stock is 6. 3 percent, and the pretax cost of debt is 8 percent. The relevant tax rate is 38 percent. What is the company’s WACC? Information on Gerken Power Co. , is shown below. Assume the company’s tax rate is 40 percent… Debt: 8, 900 bonds, $1, 000 par value each, current price is 103, YTM is 7. 9%, Common stock: 214, 000 shares outstanding, selling for $83. 40 per share; beta is 1. 19. Preferred stock: 12, 400 shares of 5. 95% preferred stock outstanding, currently selling for $97. 60 per share. Market Information: 7. 2% market risk premium and 5 percent risk-free rate. Calculate the company's WACC
1. WACC =. 63(. 133) +. 08(. 063) +. 29(. 080)(1 –. 38) WACC =. 1032, or 10. 32% 2. We will begin by finding the market value of each type of financing. We find: MVD = 8, 900($1, 000)(1. 030) = $9, 167, 000 MVE = 214, 000($83. 40) = $17, 847, 600 MVP = 12, 400($97. 60) = $1, 210, 240 V = $9, 167, 000 + 17, 847, 600 + 1, 210, 240 = $28, 224, 840 RE =. 0500 + 1. 19(. 0720) RE =. 1357, or 13. 57% RD = (1 –. 40)(. 0790) RD =. 0474, or 4. 74% RP = $5. 95 / $97. 60 RP =. 0610, or 6. 10% WACC =. 0474($9, 167, 000 / $28, 224, 840) +. 1357($17, 847, 600 / $28, 224, 840) +. 0610($1, 210, 240 / $28, 224, 840) WACC =. 1038, or 10. 38%
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