Answer:
By raising additional funds from issuing additional equity common stock ,WAAC increases by 1.07%
Explanation:
WACC=Ke*E/V+Kp*P/V*Kd*D/V*(1-t)
WACC when additional funds is raised from retained earnings:
Ke is the cost of equity is 14.7%
Kd is the cost of debt is 11.1%
Kp is the cost of preferred stock 12.2%
E=equity weight of 51% 0.51
P= preferred stock weight 4% 0.04
D=debt weight 45% 0.45
V=debt+equity+preferred stock weights
V=0.51+0.04+0.45=1
t is the tax rate at 25% 0.25
WACC=14.7%*0.51/1+12.2%*0.04+11.1%*0.45*(1-0.25)
=(14.7%*0.51)/1+(12.2%*0.04)+(11.1%*0.45*0.75)
=11.73%
WACC when additional funds is raised from common equity capital
Ke is the cost of equity is 16.8%
Kd is the cost of debt is 11.1%
Kp is the cost of preferred stock 12.2%
E=equity weight of 51% 0.51
P= preferred stock weight 4% 0.04
D=debt weight 45% 0.45
V=debt+equity+preferred stock weights
V=0.51+0.04+0.45=1
t is the tax rate at 25% 0.25
WACC=16.8%*0.51/1+12.2%*0.04+11.1%*0.45*(1-0.25)
=(16.8%*0.51)/1+(12.2%*0.04)+(11.1%*0.45*0.75)
=12.80%
By raising additional funds from issuing additional equity common stock ,WAAC increases by 1.07%
(12.80%-11.73%)
