Question

Bargeron corporation has a target capital structure of 64 percent common stock, 9 percent preferred stock, and 27 percent debt. its cost of equity is 13.4 percent, the cost of preferred stock is 6.4 percent, and the pretax cost of debt is 8.1 percent. the relevant tax rate is 40 percent.
a. what is the company's wacc? (do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places,
e.g., 32.16.) wacc %
b. what is the aftertax cost of debt? (do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places,
e.g., 32.16.) aftertax cost of debt %

Answer 1

a.

WACC is calculated as –

WACC = (Weight of common stock X Cost of common stock) + (Weight of preferred stock X Cost of preferred stock) + (Weight of debt X After tax cost of debt)

WACC = (64% X 13.4%) + (9% X 6.4%) + (27% X ((1- 40%)*8.1%))

WACC = 10.46%

b. After tax cost of debt is calculated as –

After tax cost of debt = (1- tax rate) X cost of debt pre-tax

After tax cost of debt = ((1- 40%)*8.1%))

After tax cost of debt = 4.86%