5. Capital structure weights Taylor Inc. has the following abridged balance shee

Question

5. Capital structure weights Taylor Inc. has the following abridged balance sheet: Current assets $ 3.600 Debt $ 5,200 Preferred stock $ 600 Fixed assets $ 6,400 Common equity $ 4,200 Total assets $ 10,000 Total liabilities and equity $ 10,000 The market value of Taylor?s debt, preferred stock, and common equity equals its book value. Taylor?s cost of debt is 9.0%, its cost of preferred stock is 7.7%, and its cost of common equity is 15.2%. If Taylor?s tax rate is 35%, what is the firm?s WACC? 9.80% 10.49% 9.65% 9.97 % 9.89%

Explanation / Answer

Post tax csot of debr = Cost of debt (1-Tax rate)

= 9( 1-0.35) i.e 5.85

Post tax cost of preferred stock = Preference dividend ( 1-Tax rate)

= 7.7(1-0.35) i.e 5.005

Cost of equity = 15.2

WACC = Cost of debt * weight of debt + cost of preferred stock * weight of preferred stock + Cost of equity * Weight of equity

= (5.85*5200/10000)+(5.005*600/10000)+(15.2*4200/10000)

=5.85*0.52+5.005*0.06+15.2*0.42

= 3.042+0.3003+6.384

= 9.73%

=

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