A firm has the following capital structure: 20% debt, 10% preferred stock, and 70% equity. The before-tax cost of debt is 6%, cost of preferred stock is 8%, and cost of equity is 12%. The firm’s marginal tax rate is 30 percent. Calculate its WACC.
Solution:
The WACC can be calculated using the formula.
WACC = (0.2) (0.06) (1 – 0.3) + (0.1) (0.08) + (0.7) (0.12) = 10.04%