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 13.00%. The firm will not be issuing any new stock. What is its WACC?

9.38%

9.26%

To calculate the weighted average cost of capital (WACC), you need to weigh the individual costs of each component of capital by its proportion in the capital structure. The formula to calculate WACC is as follows:

WACC = (E/V) * Re + (D/V) * Rd * (1 - Tax Rate) + (P/V) * Rp

Where:
E = Market value of equity
V = Total market value of the firm's capitalization (E + D + P)
Re = Cost of equity
D = Market value of debt
Rd = Cost of debt
Tax Rate = Corporate tax rate
P = Market value of preferred stock
Rp = Cost of preferred stock

Given the capital structure and the cost of each component of capital, we can calculate the WACC.

Step 1: Calculate the proportions of each component of capital
Debt proportion (D/V) = 40%
Preferred stock proportion (P/V) = 15%
Common equity proportion (E/V) = 45%

Step 2: Calculate the weighted costs of each component of capital
Weighted cost of debt = (D/V) * Rd * (1 - Tax Rate)
Weighted cost of preferred stock = (P/V) * Rp
Weighted cost of equity = (E/V) * Re

Step 3: Calculate WACC using the formula
WACC = Weighted cost of debt + Weighted cost of preferred stock + Weighted cost of equity

Given the information provided, the tax rate is not mentioned, so we'll assume it to be 0% for simplicity.

Substituting the values into the formula:

WACC = (0.45) * 13.00% + (0.40) * 6.00% + (0.15) * 7.50%

WACC = 5.85% + 2.40% + 1.12%

WACC = 9.37%

Therefore, the WACC for Giambono Company is 9.37%.