Question

You were hired as a consultant to giambono company, whose target capital structure is 40% debt, 15% preferred, and 45% 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 12.00%. the firm will not be issuing any new stock. what is its wacc?

Answer 1

The calculation of the Weighted Average Cost of Capital ( WAAC ) can be done using the following formula:

Weighted Average Cost of Capital = (Cost of debt * Weight of debt) + (Cost of Preferred* Weight of Preferred) +( Cost of equity * weight of equity)

Following information is available:

Cost of debt = 6%

Weight of debt = 40%

Cost of Preferred = 7.50%

Weight of Preferred = 15%

Cost of equity or retained earnings = 12%

Weight of equity = 45%

Hence, Weighted Average Cost of Capital = (6%*40%) + (7.5%*15%) + (12%*45%) = 8.925%

Hence, Weighted Average Cost of Capital is 8.925%