Bargeron Corporation has a target capital structure of 63 percent common stock,

Question

Bargeron Corporation has a target capital structure of 63 percent common stock, 8 percent preferred stock, and 29 percent debt. Its cost of equity is 13.3 percent, the cost of preferred stock is 6.3 percent, and the pretax cost of debt is 8 percent. The relevant tax rate is 38 percent a. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC . b. What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Aftertax cost of debt

Explanation / Answer

Requirement a

WACC =(We x Ce ) + (Wp x Cp )+(Wd xCd(1-tax))

We =weight of equity

Ce = cost of equity

Wp =weight of preferred stock

Cp =cost of preferred stock

Wd =weight of debt

Cd =cost of debt

WACC = (0.63*0.133)+(0.08*0.063)+(0.29*0.08(1-0.38))

= 0.08379+0.00504+0.014384

=0.103214 or 10.32%

Requirement b

After tax cost of debt = 0.08(1-0.38) = 0.0496 or 4.96%

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