Calculate Bodacious Bodywear's weighted average cost of capital under the following conditions:
*The firm has 30% debt, 10% preferred stock, and 60% equity.
*The cost of common equity is 14% and the cost of preferred stock is 9%.
*The firm's debt has a before-tax cost of debt of 10% (including flotation costs).
*The firm is in the 40% tax bracket.

Question

Calculate Bodacious Bodywear's weighted average cost of capital under the following conditions: 
*The firm has 30% debt, 10% preferred stock, and 60% equity.
*The cost of common equity is 14% and the cost of preferred stock is 9%.
*The firm's debt has a before-tax cost of debt of 10% (including flotation costs).
*The firm is in the 40% tax bracket.

Quizplus · Accepted Answer

The WACC is calculated as follows: WACC = (E/V * Re) + (D/V * Rd * (1-T)) + (P/V * Rp). Here, E/V = 0.6, D/V = 0.3, P/V = 0.1, Re = 14%, Rd = 10%, Rp = 9%, and T = 40%. WACC = (0.6 * 0.14) + (0.3 * 0.10 * (1-0.4)) + (0.1 * 0.09) = 0.084 + 0.018 + 0.009 = 0.111 or 11.1%.

Calculate Bodacious Bodywear's Weighted Average Cost of Capital Under the Following