Question

Healthy Snacks, Inc. has a target capital structure of 55 percent common stock, 5 percent preferred stock, and 40 percent debt. Its cost of equity is 14.3 percent, the cost of preferred stock is 8.9 percent, and the pretax cost of debt is 8.1 percent. What is the company's WACC if the applicable tax rate is 35 percent
A) 10.83 percent.
B) 9.61 percent.
C) 10.34 percent.
D) 9.29 percent.
E) 10.43 percent.

Answer 1

Answer:

WACC = 10.43 %

Explanation:

given data

common stock = 55 percent

preferred stock = 5 percent

debt = 40 percent

cost of equity = 14.3 percent

cost of preferred stock = 8.9 percent

pretax cost of debt = 8.1 percent

tax rate =  35 percent

to find out

company's WACC

solution

                                              weight                                    cost

common stock                       0.55                                        0.143

preferred stock                       0.05                                       0.089

debt                                          0.4                                         0.0527  

WACC                                       10.43 %

here debt cost is = 0.081 × ( 1 - 0.35 ) = 0.0527

and WACC = 0.55 × 0.143 + 0.05 × 0.089 + 0.4 × 0.0527 = 10.43 %