You were hired as a consultant to Kroncke Company, whose target capital structure is 40% debt, 10% preferred, and 50% 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 13.25%. The firm will not be issuing any new stock. What is its WACC?

Question

Business

Wright

9 November, 15:11

You were hired as a consultant to Kroncke Company, whose target capital structure is 40% debt, 10% preferred, and 50% 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 13.25%. The firm will not be issuing any new stock. What is its WACC?

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Answers (1)

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Fowler · Answer 1

Weighted Average Cost of Capital is 9.77%

Explanation:

Given data

debt D = 40% = 0.40

preferred P = 10% = 0.10

common equity C = 50% = 0.50

cost of debt CD = 6.00% = 0.06

cost of preferred CP = 7.50% = 0.0750

cost of retained earnings CR = 13.25% = 0.1325

to find out

Weighted Average Cost of Capital

solution

we know that Weighted Average Cost of Capital that is

WACC = D * CD + CP * P + CR * C

put here all these value we get Weighted Average Cost of Capital

WACC = 0.40 * 0.06 + 0.10 * 0.0750 + 0.50 * 0.1325

Weighted Average Cost of Capital = 0.09775

so Weighted Average Cost of Capital is 9.77%