An analyst gathered the following information about the capital structure and before-tax component costs for a company. The company’s marginal tax rate is 40%. Capital component Book Value (000) Market Value (000) Component cost Debt $100 $80 8% Preferred stock $20 $20 10% Common stock $100 $200 12% The company’s weighted average cost of capital (WACC) is closest to: A. 8.55%. B. 9.95%. C. 10.00%. D. 10.80%.

Use, the book value to compute weights for D and E, and P wd = 100/220 = .4545 wp = 20/220= .09 we = .4545 then waacc .4545*.08(.6) + .09*.10 + .4545*.12 = 0.085356 if you use market values =((80/300)*0.08*(0.6))+((0.2/300)*0.1)+((200/300)*0.12) = 0.092866667

Dont we use Market Value???

is it 9.95%?

What is the answer, and explanation? I get 10 using market value 0.099466667 and I’d pick 10 on exam. WACC should be computed using current costs. so yeah C.

D 10.8%

my frd agve me answers…its 9.95%…dont know how. So do we use market value?

whoops forgot tax rate. c is correct

i am an idiot meant to say b. anaswer is 9.95% you use market value

shahravi123 Wrote: ------------------------------------------------------- > my frd agve me answers…its 9.95%…dont know > how. > > So do we use market value? ok so for the weights 20+80+200 = 300 (20/300; 200/300 and 80/300) cost of debt = 80/300*.08*.6 = 0.0128 cost of preferred = 20/300*.1 = .0067 cost of equity = 200/300*.12 = 0.08 add them to get = 9.95%

this is my excel =((80/300)*0.08*(0.6))+((20/300)*0.1)+((200/300)*0.12) = .09999% so 10%

“B” is the answer

pepp Wrote: ------------------------------------------------------- > this is my excel > > =((80/300)*0.08*(0.6))+((20/300)*0.1)+((200/300)*0 > .12) = .09999% > > so 10% do math again = 0.09947 so 9.95 is correct

omg, so sneaky!.

yes 10%

nopes, its .0994 = 9.95%

So, we have to use market values??? And why do we multiply 8% by .6??? —> cost of debt = 80/300*.08*.6 = 0.0128 Thanks…

ahhh…tax rate! thanks