Abby Industries has the following capital structure. The corporate tax rate for

Question

Abby Industries has the following capital structure. The corporate tax rate for Abby is 34 percent. Determine the after tax WACC for Abby Industries.

Type                                       Amount                       Return
Mortgages (debt)                   $ 25,000,000               6%
Bonds (debt)                          $120,000,000              9%
Common Stock                     $175,000,000              10%
Preferred Stock                      $ 50,000,000               8%
Retained Earnings                  $120,000,000              12%

Explanation / Answer

Total capital = 25000000 + 120000000 + 175000000 + 50000000 + 120000000

Total capital = $490000000

Now,

Only mortgage and bonds will give tax advantages.

Tax rate = 34%

Then,

WACC = (25000000/490000000)*6%*(1-34%) + (120000000 /490000000)*9%*(1-34%) + (175000000 /490000000)*10% + (50000000 /490000000)*8% + (120000000/490000000)*12%

WACC = 8.98% or 9% approx.

So, WACC will be 8.98% or 9% approx.

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