AllCity, Inc., is financed 36 % with debt, 14 % with preferred stock, and 50 % with common stock. Its cost of debt is 5.7 %, its preferred stock pays an annual dividend of $ 2.45 and is priced at $ 29. It has an equity beta of 1.13. Assume the risk-free rate is 2.4 %, the market risk premium is 7.3 % and AllCity's tax rate is 35 %. What is its after-tax WACC? g

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hyderali230 hyderali230 · Answer 1 · 2020-07-04T03:41:27+02:00

Answer:

WACC is 7.84%

Explanation:

First we need to calculate the after-tax cost of debt

Cost of Debt (after Tax) = Pre-tax cost of debt ( 1 - Tax rate )

Cost of Debt (after Tax) = 5.7% x ( 1 - 35% ) = 3.705%

Now calculate the cost of preferred share

Cost of preferred share = Dividend on Preferred share / Market value of preferred share

Cost of preferred share = $2.45 / $29 = 0.0845 = 8.45%

Now calculate the cost f equity

Cost of equity = Rf + Beta x Market risk premium

Cost of equity = 2.4% + 1.13 x 7.3%

Cost of equity = 2.4% + 8.249%

Cost of equity = 10.649%

Now use following formula to calclulate the WACC

WACC = ( Cost of Equity x Weight of common stock ) + ( Cost of Debt x Weight of Debt ) + ( Cost of preferred share x weight of preferred share )

WACC = ( 10.649% x 50% ) + ( 3.705% x 36% ) + ( 8.45% x 14% )

WACC = 5.3245% + 1.3338% + 1.183%

WACC = 7.8413%