Busıness Fınance Iı Deneme Sınavı Sorusu #1030573
NEO Corp. has the following optimal capital structure:
- Long-term Debt 40%
- Preferred Stocks 30%
- Common Equity 60%
The interest rate on the company’s long-term borrowings is 10%. Preferred stockholders require 20% return on their investments and common shareholders are paid 12% on equity capital. The company has a tax rate of 35%. What is the WACC for NEO Corp.?
|
15.80% |
|
16.40% |
|
18.50% |
|
20.60% |
|
22.70% |
The cost of each capital component is weighed at the proportions in the capital structure to quantify the firm’s WACC.
, where wD is the weight of debt financing in the capital structure, kD is the cost component of debt funds, T is the tax rate, accordingly wPS is the weight of preferred stocks, kPS is its cost component, wCE is the weight of common equity and kCE is the cost of equity capital. Therefore;
WACC=0.40*0.10*(1-0.35)+0.30*0.20+0.60*0.12=0.1580
As it can be seen from the above calculation the WACC for A & B is 15.80%. The correct answer is A.
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