marginal tax rates
Question
A firm's weighted average cost of capital.?
The Supply Company plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt 10%, preferred stock 11%, and common stock 18%. Assuming a 40% marginal tax rate, what is the firm's weighted average cost of capital?
3 months ago - 1 answers
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WACC is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else help equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk. The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing: Weighted Average Cost Of Capital (WACC) = E/V * Re + D/V * Rd * (1 - Tc) Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate In your case, WACC = 0.2 * 11 + 0.5 * 18 + 0.3 * 10 * 0.6 = 2.2 + 9 + 1.8 = 13%
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3 months ago
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