Bargeron Corporation has a target capital structure of 64 percent common stock,

Question

Bargeron Corporation has a target capital structure of 64 percent common stock, 9 percent preferred stock, and 27 percent debt. Its cost of equity is 13.4 percent, the cost of preferred stock is 6.4 percent, and the pretax cost of debt is 8.1 percent. The relevant tax rate is 40 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

b.after tax cost of debt=8.1(1-0.4)=4.86%

a.WACC=Respective costs*Respective weights

=(0.64*13.4)+(0.09*6.4)+(0.27*4.86)=10.46%(Approx)

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