Suppose that TNT, Inc. has a capital structure of 43 percent equity, 23 percent preferred stock, and 34 percent debt. If the before-tax component costs of equity, preferred stock and debt are 15.4 percent, 10 percent and 7 percent, respectively, what is TNT's WACC if the firm faces an average tax rate of 28%?
A) 9.45%
B) 10.64%
C) 10.80%
D) 11.30%

Question

Quizplus · Accepted Answer

The WACC is calculated as follows: WACC = (E/V * Re) + (P/V * Rp) + (D/V * Rd * (1-Tc)), where E, P, and D are the market values of equity, preferred stock, and debt, respectively, V is the total value (E+P+D), Re, Rp, and Rd are the costs of equity, preferred stock, and debt, and Tc is the tax rate. Substituting the given values: WACC = (0.43 * 0.154) + (0.23 * 0.10) + (0.34 * 0.07 * (1-0.28)) = 0.06622 + 0.023 + 0.017136 = 0.106356 or 10.64%.

Suppose That TNT, Inc