You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 12.75%. The firm will not be issuing any new stock. What is its WACC?
(Points : 5)
8.98%
9.26%
9.54%
9.83%
10.12%
9.26
8.98%
To find the Weighted Average Cost of Capital (WACC) for Giambono Company, we need to calculate the weighted average of the cost of each component of the capital structure.
1. Calculate the weight of each component:
Debt weight = 40%
Preferred stock weight = 15%
Common equity weight = 45%
2. Calculate the cost of each component:
Cost of debt = 6.00%
Cost of preferred stock = 7.50%
Cost of retained earnings = 12.75%
3. Calculate the weighted average cost:
WACC = (Weight of Debt × Cost of Debt) + (Weight of Preferred Stock × Cost of Preferred Stock) + (Weight of Common Equity × Cost of Retained Earnings)
WACC = (0.40 × 6.00%) + (0.15 × 7.50%) + (0.45 × 12.75%)
WACC = 2.40% + 1.125% + 5.7375%
WACC = 9.2625%
Therefore, the WACC for Giambono Company is approximately 9.26%.
The correct answer is: 9.26%