Question

Compute the WACC of a firm that currently has $1 million in debt and $2 million in equity and $1 million in preferred stock. The current yield to maturity on the firms debt is 2%. Equity holders require a 6% return and preferred stock holders require a 3.9% return. The current tax rate that applies to the firm is 30%

Answer 1

WACC=proportion of debt*cost of debt or yield to maturity of debt*(1-tax rate)+proportion of equity*cost of equity+proportion of preferred stock*cost of preferred stock=1/(1+2+1)*2%*(1-30%)+2/(1+2+1)*6%+1/(1+2+1)*3.9%=4.32500%