Question

   You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of common equity is 12.25%. The firm will not be issuing any new stock. What is its WACC? Answer is a percentage

Answer 1

Formula for calculating WACC is:

K_WACC = (W_E x K_E) + (W_D x K_D) + (W_P x K_P)

Where:

K_WACC = Weighted average cost of capital

W_E = Proportion of equity (common stock)

K_E = Cost of equity (common stock)

W_D = Proportion of debt

K_D = After-tax cost of debt

W_P = Proportion of preferred stock

K_P = Cost of preferred stock

Putting values:

K_WACC = (0.45 x 0.1225) + (0.40 x 0.06) + (0.15 x 0.075)

= 0.055125 + 0.024 + 0.01125

= 0.090375 or 9.04%