Given the following information on Silver Lake, Inc. capital structure, compute

Question

Given the following information on Silver Lake, Inc. capital structure, compute the companys weighted average cost of capital (WACC). The companys marginal tax rate is 40 percent

Type of capital                   Percent of Capital structure        Before Tax component Cost

Bonds                                                   56.58%                                                  15.00%

Preferred Stock 14.68%                                                  16.36%

Common                                             28.74%                                                  14%

a.5.59%

b. 11.52%

c.15.58%

d. 76.37%

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Explanation / Answer

Hi,

Please find the correct answer as follows:

WACC = weight of common stock*cost of common stock + weight of preffered stock*cost of preffered stock + weight of debt*cost of debt*(1 -tax rate)

=28.74%*14%+14.68%*16.36%+56.58%*15%*(1-40%)

=11.52%

Hence, option (B), 11.52% is the correct answer

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