Suppose that PAW, Inc. has a capital structure of 60 percent equity, 10 percent preferred stock, and 30 percent debt. If the before-tax component costs of equity, preferred stock and debt are 17.5 percent, 12 percent and 6.5 percent, respectively, what is PAW's WACC if the firm faces an average tax rate of 28%?
A) 10.71%
B) 12.00%
C) 13.10%
D) 13.65%

Question

Quizplus · Accepted Answer

To calculate the weighted average cost of capital (WACC), we need to multiply the cost of each component by its weight and sum the results.

Weighted cost of equity = 0.60 x 17.5% = 10.50%
Weighted cost of preferred stock = 0.10 x 12.0% = 1.20%
Weighted cost of debt = 0.30 x (6.5% x (1-0.28)) = 1.33%

WACC = 10.50% + 1.20% + 1.33% = 13.10%

Therefore, the answer is (C) 13.10%.

Suppose That PAW, Inc