Suppose that MNINK Industries’ capital structure features 63 percent equity, 8 p

Question

Suppose that MNINK Industries’ capital structure features 63 percent equity, 8 percent preferred stock, and 29 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 11.50 percent, 9.40 percent, and 8.00 percent, respectively.

What is MNINK’s WACC if the firm faces an average tax rate of 34 percent? (Round your answer to 2 decimal places.)

Suppose that MNINK Industries’ capital structure features 63 percent equity, 8 percent preferred stock, and 29 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 11.50 percent, 9.40 percent, and 8.00 percent, respectively.

Explanation / Answer

After tax cost of debt = 8%(1- 34%)

= 8% ( 0.66) = 0.0528 or 5.28%

WACC =[ weight of debt * after tax cost of debt ] + [ weight of equity * cost of equity ] + [ weight of preferred stock * cost of preferred stock ]

weight of debt = 29% , after tax cost of debt = 5.28% , weight of equity = 63% , cost of equity = 11.5% , weight of preferred stock = 8% , cost of preferred stock = 9.4%

WACC = [ 29% * 5.28% ] + [ 63% * 11.5% ] + [ 8% * 9.4% ]

= [ 0.015312 ] + [ 0.07245] + [ 0.00752 ]

= 0.095282 or 9.53 % which is the required weighted average cost of capital (WACC)

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