Tiffany Baking Co. wants to arrange a $50 million in capital for manufacturing a

Question

Tiffany Baking Co. wants to arrange a $50 million in capital for manufacturing a new consumer product. The current financing plan is 60% equity capital and 40% debt capital. Compute the WACC for the following financing scenario.

Equity capital: 60%, or $30 million, via common stock sales for 40% of this amount that will pay dividends at a rate of 5% per year, and the remaining 60% from retained earnings, which currently earn 9% per year.

Debt capital: 40% or 20 million, obtained through two sources

Explanation / Answer

cost of equity = 60%*9%+40%*5% =7.40% cost of debt =50%*8%+ 50%*10% =9.00% WACC =9.00%*40% + 7.4%*60% =8.04%

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