Question

Sunland Co. has a capital structure, based on current market values, that consists of 26 percent debt, 3 percent preferred stock, and 71 percent common stock. If the returns required by investors are 10 percent, 10 percent, and 15 percent for the debt, preferred stock, and common stock, respectively, what is Sunland’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent.

Answer 1

Answer:

12.51%

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)

= (0.10 × 26%) × ( 1 - 40%) +  (0.10 × 3%) +  (0.15 × 71%)

= 1.56% + 0.30% + 10.65%

= 12.51%

Simply we multiply the weightage with its cost