Question

Pharoah Co. has a capital structure, based on current market values, that consists of 30 percent debt, 5 percent preferred stock, and 65 percent common stock. If the returns required by investors are 12 percent, 13 percent, and 15 percent for the debt, preferred stock, and common stock, respectively, what is Pharoah’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent.

X Your answer is incorrect. Pharoah Co. has a capital structure, based on current market values, that consists of 30 percent debt, 5 percent preferred stock, and 65 percent common stock. If the returns required by investors are 12 percent, 13 percent, and 15 percent for the debt, preferred stock, and common stock, respectively, what is Pharoah's after-tax WACC? Assume that the firm's marginal tax rate is 40 percent. (Round final answer to 2 decimal places, e.g. 15.25%.) After tax WACC 13.47

I solved it wrong by doing 30%*12*(1-40%)+13%*12%*+65%*15%=

0.021600 + 0.015600 + 0.097500=

0.1347=13.47%

I am not sure what I am doing wrong. Please show answer with full calculation

Answer 1

WACC = Sum of (weight * cost of capital)
= (0.30 * 12 * (1-0.40) + (0.05 * 13) + (0.65 * 15)
= 2.16% + 0.65% + 9.75%
= 12.56%

After tax WACC = 12.56%