XYZ has a target capital structure calling for 30% debt, 10% preferred stock, and 60% common equity. It before-tax cost of debt, is 11%; it after-tax cost of debt is 11 %( 0.6) = 6.6%; its cost of preferred stock is 10.3%; its cost of common equity is 14.5%; it marginal tax rate is 40%; and all of its new equity will come from retained earnings. XYZ weighted average cost of capital (WACC) is:
A. 11%
B. 11.7%
C. 10.7%
D. 10%
Answer:B
XYZ has a target capital structure calling for 30% debt, 10% preferred stock, and 60% common equity. It before-tax cost of debt, is 11%; it after-tax cost of debt is 11 %( 0.6) = 6.6%; its cost of preferred stock is 10.3%; its cost of common equity is 14.5%; it marginal tax rate is 40%; and all of its new equity will come from retained earnings. XYZ weighted average cost of capital (WACC) is:
A. 11% B. 11.7% C. 10.7% D. 10%