Suppose that B2B, Inc., has a capital structure of 37 percent equity, 17 percent

Question

Suppose that B2B, Inc., has a capital structure of 37 percent equity, 17 percent preferred stock, and 46 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 14.0 percent, 10.0 percent, and 9.0 percent, respectively.

What is B2B’s WACC if the firm faces an average tax rate of 30 percent?

Suppose that B2B, Inc., has a capital structure of 37 percent equity, 17 percent preferred stock, and 46 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 14.0 percent, 10.0 percent, and 9.0 percent, respectively.

Explanation / Answer

WACC= [(D/V)*(1-tax)rd]+[(E/V)*re]+[(P/V)*rp] = 0.46*(1-0.30)*0.09 + 0.37*0.14 + 0.17*0.10 = 0.097(9.77%)

Where:

Re = cost of equity
Rd = cost of debt

Rp= cost of preferrred
E = market value of the firm's equity
D = market value of the firm's debt

P = market value of the firm's preferred
V = E + D + P
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt

P/V = percentage of financing that is preferred

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