Question

What is the WACC for a firm that is 30% weighted with bonds that have a YTM of 10% and a tax rate of 34%, 10% weighted with preferred stock with a cost of 6% and 60% weighted with common stock at a cost of 14%

Answer 1

Answer:

10.98%

Explanation:

The formula to compute WACC is shown below:

= Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of  common stock) × (cost of common stock)  

= (0.30 × 10%) × ( 1 - 34%) +  (0.10 × 6%) +  (0.60 × 14%)

= 1.98% + 0.6% + 8.4%

= 10.98%

Simply we multiply the weighatge by its cost