Question

Protec Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 5.00%, the cost of preferred is 7.0%, and the cost of retained earnings is 11.50%. The firm will not be issuing any new stock. What is its WACC? 6.75% 7.18% 7.64% 7.93% 8.23%

Answer 1

Answer:

The correct answer is 8.23%.

Explanation:

According to the scenario, the computation can be done as:

WACC of debt = Respective costs of debt× Respective weight of debt

= (0.4 × 5)

= 2

WACC of preferred = Respective costs of preferred × Respective weight of preferred

= (0.15 × 7)

= 1.05

WACC of common equity = Respective costs of common equity × Respective weight of retained earning

= (0.45 × 11.5)

= 5.175

So, Total WACC = WACC of debt + WACC of preferred + WACC of common equity

= 2 + 1.05 + 5.175

= 8.225 or 8.23 (approx.)