MinMax Corp has the following capital structure: 55% common equity (giving a return of 9%), 10% preferred shares (with a yield of 6%), and 35% debt (with a coupon rate of 10% and yield to maturity of 6.5%).If there are no taxes, what is the firm's WACC?

Question

Quizplus · Accepted Answer

To calculate WACC, we need to find the weighted average cost of each component of capital.

Weighted cost of equity = 0.55 x 9% = 4.95%
Weighted cost of preferred stock = 0.10 x 6% = 0.6%
Weighted cost of debt = 0.35 x 6.5% = 2.275%

WACC = weighted cost of equity + weighted cost of preferred stock + weighted cost of debt 
WACC = 4.95% + 0.6% + 2.275% = 7.825%

Therefore, the firm's WACC is 7.825%. Option C is the correct answer.

MinMax Corp Has the Following Capital Structure: 55% Common Equity