3 Targaryen Corporation has a target capital structure of 60 percent common stoc
ID: 2808862 • Letter: 3
Question
3 Targaryen Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 23 percent. 8.33 polnts a. What is the company's WACC? (Do not round intermediate calculations and enter Skipped your answer as a percent rounded to 2 decimal places, e.g., 32.16.) 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.) eBook Hint Print :a.|WACC References b. Cost of debtExplanation / Answer
a) Calculation of WACC
WACC = Ke*(E/V) + Kp*(P/V) + Kd*(D/V)*(1-T)
where
Ke - Cost of Equity =11%
Kp- Cost of preffered stock = 5%
Kd - Cost of debt =6%
E - Value of equity = 60%
P - Value of preffered stock = 5%
D - Value of debt = 35%
V - Total Value = E+P+D =100%
T - Tax rate = 23%
WACC = 11*.6 +5*.05 + 6*.35*(1-.23)
= 6.6+.25+1.617
= 8.47%
b)
After tax cost of debt = Pre tax cost of debt * (1-tax rate)
= 6 *(1-.23)
= 6*.77
= 4.62%
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