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QUESTION 1 You were hired as a consultant to 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%

Respuesta :

Shahzaibfaraz

Answer:

The answer is WACC IS 8.23%

Explanation:

The Weighted average cost of capital or WACC is the weighted average of the three different components that make up the capital structure of a company.

The formula for WACC is,

WACC = D/A * rD*(1-tax) + P/A * rP + E/A * rE

Where,

  • D/A is Debt over Total Assets
  • rD is the cost of debt and (1-tax) represents after tax cost of debt
  • P/A is preferred stock over Total Assets
  • rP is the cost of preferred stock
  • E/A is common equity over Total Assets
  • rE is cost of common equity

Thus,

WACC = 0.4 * 0.05 + 0.15 * 0.07 + 0.45 * 0.115

WACC = 0.08225 or 8.225%

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