A firm has a capital structure containing 40 percent debt,10 percent preferred stock,and 50 percent common stock equity.The firm's debt has a yield to maturity of 9.50 percent.Its preferred stock's annual dividend is $7.50 and the preferred stock's current market price is $50.00 per share.The firm's common stock has a beta of 0.90 and the risk-free rate and the market return are currently 4.0 percent and 13.5 percent,respectively.The firm is subject to a 40 percent marginal tax rate.What is the WACC for the firm?

Question

Quizplus · Accepted Answer

Cost of preferred = $7.50 / $50.00 = 15%
WACC = .40 * 9.50% * (1-.40)+ .10*15% + .50*(4%+0.90*(13.5%-4%))

A Firm Has a Capital Structure Containing 40 Percent Debt,10