Pfd Company has debt with a yield to maturity of , a cost of equity of , and a cost of preferred stock of . The market values of its debt, preferred stock, and equity are million, million, and million, respectively, and its tax rate is . What is this firm's after-tax WACC? Note: Assume that the firm will always be able to utilize its full interest tax shield.

Pfd Company has debt with a yield to maturity of 7.5%, a cost of equity of 13.5%, and a cost of preferred stock of 9.5%. The market values of its debt, preferred stock, and equity are $10.5 million, $3.5 million, and $24.5 million, respectively, and its tax rate is 40%. What is this firm's weighted average cost of capital (WACC)?

10.68%

Explanation:

As we know that:

WACC = Ke * Ve / (Ve + Vpref + Vd (1-Tax))

+   Kd * Vd*(1-tax) / (Ve + Vpref + Vd*(1-Tax))

  +   Kpref * Vpref / (Ve + Vpref + Vd (1-Tax))

Here

Ke is 13.5%

Pre tax Kd is 7.5%

Kpref is 9.5%

Ve is value of equity and is $24.5 million

Vpref is value of equity $3.5 million

Vd is $10.5 million

Tax rate is 40%

By putting the values, we have:

WACC =       13.5% *$24.5 / ($24.5m + $3.5m + $10.5m (1-40%))

                   + 7.5% * (1-40%) * $45m / ($24.5m + $3.5m + $10.5m (1-40%))

                   + 9.5% * $3.5m / ($24.5m + $3.5m + $10.5m (1-40%))

WACC = 0.045 * 0.273   +   0.095 * 0.091  +  0.135 * 0.636

= 10.68%

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