Answer:
The WACC is 9.09% and option B is the correct answer.
Explanation:
The WACC or the weighted average cost of capital is a firm's average cost of its capital structure that comprises of debt, preferred stock and common equity. The formula fro WACC is,
WACC = wD * rD * (1-tax rate) + wP * rP + wE * rE
Where,
- wD, wP and wE represents the weightage of debt, preferred stock and common stock in the capital structure or as a proportion of total assets
- rD, rP and rE represents the cost of debt, preferred stock and common stock
- We take the after tax cost of debt. So, rD is multiplied by (1- tax rate)
Total Assets = 17000 + 3000 + 15000 = 35000
Taking out these values in thousands for simplicity.
WACC = 15/35 * 0.08 * (1-0.3) + 3/35 * 0.1 + 17/35 * 0.12
WACC = 0.09085 or 9.085% rounded off to 9.09%
