A ﬁrm ﬁnances its projects with 45% common stock, 15% preferred stock, and 40% debt. The ﬁrm has a 34% marginal tax rate. The cost of equity is 9%, the cost of preferred is 8%, and the cost of
Debt is 7%. What is the WACC?

Question

Quizplus · Accepted Answer

The WACC is calculated as: WACC = (E/V * Re) + (P/V * Rp) + (D/V * Rd * (1-Tc)), where E, P, and D are the proportions of equity, preferred stock, and debt, respectively, and Re, Rp, and Rd are their respective costs. Tc is the tax rate. Substituting the given values: WACC = (0.45 * 0.09) + (0.15 * 0.08) + (0.40 * 0.07 * (1-0.34)) = 0.0405 + 0.012 + 0.01848 = 0.0710 or 7.10%.

A ﬁRm ﬁNances Its Projects with 45% Common Stock, 15