Ask Question
23 May, 16:07

The Color Box uses a combination of common stock, preferred stock, and debt financing. The company wants preferred stock to represent 7 percent of the total financing. It also wants to structure the firm in a manner that will produce a weighted average cost of capital of 9.5 percent. The aftertax cost of debt is 4.8 percent, the cost of preferred is 8.9 percent, and the cost of common stock is 14.7 percent. What percentage of the firm's capital funding should be debt financing? a. 44.78 percentb. 54.15 percentc. 52.03 percentd. 48.42 percente. 39.21 percent

Answers (1)
  1. Z
    23 May, 18:22
    0
    Weight of debt, Wd = 0.4842 or 48.42%

    Explanation:

    WACC = Wd*Rd * (1-t) + We*Ke+Wp*Kp

    W is weights of respective portfolios

    R is return on respective portfolios

    Wd+We+Wp = 1

    9.50% = Wd*4.80% + (0.93-Wd) * 14.70%+0.07*8.90%

    9.5% = Wd*4.80%+13.671%-14.70%*Wd+0.623%

    9.90%*Wd = 4.794%

    Weight of debt, Wd = 0.4842 or 48.42%
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “The Color Box uses a combination of common stock, preferred stock, and debt financing. The company wants preferred stock to represent 7 ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers
Sign In
Ask Question