Homework #6G (WACC)
Question 1
Given the following information on Big Brothers, Inc. capital structure, compute the
company’s weighted average cost of capital (WACC). The company’s marginal tax rate
is 40%.
Round the answer to two decimal places in percentage form. (Write the percentage sign
in the "units" box)
Type of Capital Percent of Capital Structure Before-Tax Component Cost
Bonds 35% 10.67%
Preferred Stock 19% 17.69%
Common Stock Please calculate it 14.17%
Your Answer:
Step 1:
Calculate weight of Common stock financing in the firm’s capital structure:
100% - 35% - 19% = 46%
Step 2:
Calculate after-tax cost of debt financing:
10.67% * (1-0.40) = 6.40%
Step 2: Calculate WACC:
0.35*6.40% + 0.19 * 17.69% + 0.46 * 14.17% = 2.24 + 3.36 + 6.52 =12.12%
This study source was downloaded by 100000872281541 from CourseHero.com on 09-30-2023 07:57:21 GMT -05:00
https://www.coursehero.com/file/20945316/Homework-6G-WACC/
Question 1
Given the following information on Big Brothers, Inc. capital structure, compute the
company’s weighted average cost of capital (WACC). The company’s marginal tax rate
is 40%.
Round the answer to two decimal places in percentage form. (Write the percentage sign
in the "units" box)
Type of Capital Percent of Capital Structure Before-Tax Component Cost
Bonds 35% 10.67%
Preferred Stock 19% 17.69%
Common Stock Please calculate it 14.17%
Your Answer:
Step 1:
Calculate weight of Common stock financing in the firm’s capital structure:
100% - 35% - 19% = 46%
Step 2:
Calculate after-tax cost of debt financing:
10.67% * (1-0.40) = 6.40%
Step 2: Calculate WACC:
0.35*6.40% + 0.19 * 17.69% + 0.46 * 14.17% = 2.24 + 3.36 + 6.52 =12.12%
This study source was downloaded by 100000872281541 from CourseHero.com on 09-30-2023 07:57:21 GMT -05:00
https://www.coursehero.com/file/20945316/Homework-6G-WACC/
