Given the following information on Big Brothers, Inc. capital structure, compute the company’s weighted average cost of capital (WACC). The company’s marginal tax rate is 40%.
Round the answer to two decimal places in percentage form.
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Formula for calculating WACC:
WACC = (Weight of Equity X Cost of Equity) + (Weight of Preferred Stock X
Cost of Preferred Stock) + [Weight of debt X Cost of Debt (1 - Tax)]
Here we substitute the values as per the question :-
Weight of Equity = 45% = 0.45
Cost of Equity = 17.73% = 0.1773
Weight of Preferred Stock = 14% = 0.14
Cost of Preferred Stock = 15.89% = 0.098
Weight of debt = 41% = 0.41
Cost of Debt = 13.46% = 0.1346
1 - Tax = 1 - 40 = 60% = 0.60
WACC = (0.45 X 0.1773) + (0.14 X 0.1589) + (0.41 X 0.1346 X 0.60)
= 0.08 + 0.02 + 0.03
= 13 %
Therefore Big Brothers, Inc. WACC is = 13 %.
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