Question

Shi Import-Export’s balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi’s tax rate is 25%, rd 5 6%, rps 5 5.8%, and rs 5 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?

Answer 1

Answer:

Shi Import-Export’s  WACC is 9.44%

Explanation:

WACC is the minimum return that a project MUST  offer before it can be accepted. It shows the risk of the company

Capital Source            Weight         Cost             WACC

Debt                                30%          4.5%               1.35%

Preferred Stock               5%           5.8%               0.29%

Common Equity             65%           12%.               7.80%

Total                              100%                                 9.44%

Cost of Debt

Cost of Debt = Interest × ( 1-tax rate)

                     = 6% ×  ( 1-0.25)

                     = 4.5%

Cost of Preferred Stock

Cost of Preferred Stock = 5.8%

Cost of Common Equity

Cost of Common Equity = 12%.