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 percent?
A)10.71 percent
B)12.00 percent
C)13.10 percent
D)13.65 percent

Question

Quizplus · Accepted Answer

First, we need to calculate the weights of each component:

Equity: 0.6 
Preferred Stock: 0.1
Debt: 0.3

Next, we can use the formula for WACC:

WACC = (Equity * Cost of Equity) + (Preferred Stock * Cost of Preferred Stock) + (Debt * Cost of Debt) * (1 - Tax Rate)

WACC = (0.6 * 0.175) + (0.1 * 0.12) + (0.3 * 0.065) * (1 - 0.28)
WACC = 0.105 + 0.012 + 0.0147
WACC = 0.131 or 13.10%

Therefore, the best choice is C, 13.10%.

Suppose That PAW, Inc