You were hired as a consultant to Giambono Company, whose capital structure is 40% debt, 15% preferred stocks, and 45% common stock equity. The after-tax cost of debt is 6.00%, the cost of preferred stocks is 7.50%, and the cost of common stock equity is 13.00%. What is its WACC?
9.38
To calculate the Weighted Average Cost of Capital (WACC), you need to determine the proportion of each component of the company's capital structure and multiply it by its respective cost of capital.
Here's how you can calculate the WACC for Giambono Company:
Step 1: Calculate the proportion of each component:
- Debt: 40%
- Preferred stocks: 15%
- Common stock equity: 45%
Step 2: Determine the cost of each component:
- After-tax cost of debt: 6.00%
- Cost of preferred stocks: 7.50%
- Cost of common stock equity: 13.00%
Step 3: Calculate the weighted cost for each component:
Debt component: 40% * 6.00% = 2.40%
Preferred stocks component: 15% * 7.50% = 1.125%
Common stock equity component: 45% * 13.00% = 5.85%
Step 4: Sum up the weighted costs for each component to get the WACC:
WACC = Debt component + Preferred stocks component + Common stock equity component
WACC = 2.40% + 1.125% + 5.85% = 9.375%
Therefore, the Weighted Average Cost of Capital (WACC) for Giambono Company is 9.375%.