Suppose that TW, Inc. has a capital structure of 25 percent equity, 15 percent preferred stock, and 60 percent debt. If the before-tax component costs of equity, preferred stock and debt are 13.5 percent, 9.5 percent and 4 percent, respectively, what is TW's WACC if the firm faces an average tax rate of 30 percent?
A)6.19 percent
B)6.48 percent
C)7.2 percent
D)9.0 percent

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 market values of equity, preferred stock, and debt, respectively, and V is the total market 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 = (0.25 * 13.5%) + (0.15 * 9.5%) + (0.60 * 4% * (1-0.30)) = 6.48%.

Suppose That TW, Inc