Question

Targaryen Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Its cost of equity is 10 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 23 percent.

a.
What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

b. What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

a. 8.41%

b. 4.62%

Explanation:

The computations are presented below:

a. Company's WACC:

= Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of  common stock) × (cost of common stock)

= (0.25 × 6%) × ( 1 - 23%) +  (0.05 × 5%) +  (0.70 × 10%)

= 1.155% + 0. 25% + 7%

= 8.41%

b. After tax cost of debt

= cost of debt × ( 1- tax rate)

= 6% × ( 1 - 23%)

= 4.62%