the target capital structure for QM industries is 45% common stock, 5% preferred stock and 50% debt. If the cost of common equity for the firm is 18.9%, the cost of preferred stock is 10.7% and the before tax cost of debt is 7.7% and the firm's tax rate is 35%
QM's WACC is_____
To calculate QM Industries' weighted average cost of capital (WACC), we need to determine the weightings and costs of each component of its capital structure.
Given information:
- Common stock weight = 45%
- Preferred stock weight = 5%
- Debt weight = 50%
- Cost of common equity = 18.9%
- Cost of preferred stock = 10.7%
- Before-tax cost of debt = 7.7%
- Tax rate = 35%
Step 1: Calculate the after-tax cost of debt
Since the cost of debt is given as the before-tax cost, we need to adjust it for taxes using the formula:
After-tax cost of debt = Before-tax cost of debt * (1 - Tax rate)
After-tax cost of debt = 7.7% * (1 - 35%)
After-tax cost of debt = 7.7% * 0.65
After-tax cost of debt = 5.005%
Step 2: Calculate the WACC
The WACC is the weighted average of the costs of each component of the capital structure. We can use the following formula:
WACC = (Weight of common stock * Cost of common equity) + (Weight of preferred stock * Cost of preferred stock) + (Weight of debt * After-tax cost of debt)
WACC = (0.45 * 18.9%) + (0.05 * 10.7%) + (0.50 * 5.005%)
WACC = 8.505% + 0.535% + 2.5025%
WACC = 11.54%
Therefore, QM Industries' WACC is 11.54%.