You were hired as a consultant to Giambono Company, whose target capital structu

Question

You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity.  The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 13.00%.  The firm will not be issuing any new stock.  What is its WACC?

a.

9.38%

b.

11.44%

c.

9.19%

d.

7.22%

e.

10.22%

  

a.

     

9.38%

     

b.

     

11.44%

     

c.

     

9.19%

     

d.

     

7.22%

     

e.

     

10.22%

   You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 13.00%. The firm will not be issuing any new stock. What is its WACC?

Explanation / Answer

WACC = 6 (0.4) + 7.5(0.15) + 13(0.45) = 2.4 + 1.125+ 5.85 = 9.375

option a is correct

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