incorrect, P9-12 (similar to) Question Help The effect of tax rate on WACC K. Be

Question

incorrect, P9-12 (similar to) Question Help The effect of tax rate on WACC

K. Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 30% debt, 20% preferred stock, and 50% common stock. The cost of financing with retained earnings is 14%, the cost of preferred stock financing is 8%, and the before-tax cost of debt financing is 7%. Calculate the weighted average cost of capital (WACC) given a tax rate of 40 %.

The firm's WACC is

nothing%.

(Round to two decimal places.)

Explanation / Answer

WACC = rD (1- Tc )*( D / V )+ rE *( E / V ) + rP * (P/V)

Where...

rD = The required return of the firm's Debt financing
(1-Tc) = The Tax adjustment for interest expense
(D/V) = (Debt/Total Value)
rE= the firm's cost of equity
(E/V) = (Equity/Total Value)
rP= the firm's cost of preferred stock
(P/V) = (Preferred stock financing/Total Value)

WACC = 0.3 * 0.07 * (1-0.4) + 0.2*0.08 + 0.5*0.14 = 0.0986 = 9.86%

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