Answer:
the WACC is 8.65%.
Explanation:
Total firm capital = $450,000 + $150,000 + $350,000
= $950,000
Weight of debt in the capital structure = $450,000/ $950,000
= 47.37%
Weight of preferred stock in the capital structure
= $150,000/ $950,000
= 15.79%
Weight of common stock in the capital structure
= $350,000/ $950,000
= 36.84%
The weighted average cost of capital is calculated using the below formula:
WACC= Wd*Kd(1 - t) + Wps*Kps + We*Ke
where:
Wd = Percentage of debt in the capital structure.
Kd = The before tax cost of debt
Wps = Percentage of preferred stock in the capital structure
Kps = Cost of preferred stock
We = Percentage of common stock in the capital structure
Ke = The cost of common stock
T = Tax rate
WACC = 47.37%*8%*(1 – 0.30) + 0.1579*10% + 36.84%*12%
= 2.65272% + 1.5790% + 4.4208%
= 8.65252%
Therefore, the WACC is 8.65%.
