What is the WACC for a firm that is 30% weighted with bonds that have a YTM of 10% and a tax rate of 34%, 10% weighted with preferred stock with a cost of 6% and 60% weighted with common stock at a cost of 14%

Question

Business

Aldo Gates

23 March, 10:52

What is the WACC for a firm that is 30% weighted with bonds that have a YTM of 10% and a tax rate of 34%, 10% weighted with preferred stock with a cost of 6% and 60% weighted with common stock at a cost of 14%

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Answers (1)

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Lance Taylor · Answer 1

10.98%

Explanation:

The formula to compute WACC is shown below:

= Weightage of debt * cost of debt * (1 - tax rate) + (Weightage of preferred stock) * (cost of preferred stock) + (Weightage of common stock) * (cost of common stock)

= (0.30 * 10%) * (1 - 34%) + (0.10 * 6%) + (0.60 * 14%)

= 1.98% + 0.6% + 8.4%

= 10.98%

Simply we multiply the weighatge by its cost