Corporate Finance Q73
73An analyst gathers the following information about the capital structure and before-tax component costs for a company. The company’s marginal tax rate is 35 percent.
| Capitalcomponent | Book Value(000) | Market Value(000) | Component cost |
| Debt x | € 120 | € 100 | 6% |
| Preferred stock | € 60 | € 60 | 9% |
| Common stock | € 300 | € 240 | 13% |
The company’s weighted average cost is closest to:
- Option : A
- Explanation : The company’s weighted average cost WACC is equal to: WACC = Wd Rd (1 – t) + Wp Rp + We Re The target capital structure is: Market value of equity = 240 / 400 = 60% Market value of debt = 100 / 400 = 25% Market value of preferred stock = 60 / 400 = 15%> Rd (1 – t) = 6% (1 – 35%) = 3.90%, Re = 13%, Rp = 9% WACC = 0.25 * 3.9% + 0.15 * 9% + 0.60 * 13% = 10.13%
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