Mikey s Machines is trying to decide whether or not to invest in a new line of b
ID: 2722320 • Letter: M
Question
Mikey s Machines is trying to decide whether or not to invest in a new line of business renting equipment and wants to calculate their WACC. Assume that their capital structure consists of 35% common stock, 10% preferred stock, and 55% debt. Further, analysts predict that their future cost of debt will be 6% and their cost of preferred stock is 10%. We also know that the current price of common stock is $24 and that the common stock is expected to pay a $2.00 dividend and then continue to grow at a rate of 5%. The firm s tax rate is 35%. What is this firm s WACC?
a. 7.81%
b. 8.97%
c. 4.90%
d. 7.96%
e. None of these
Explanation / Answer
Answer:a. 7.81%
Kd after tax=6%(!-0.35)=3.9%
Ke=$2/$24+5%=13.33%
Capital structure Weight Cost of capital WACC Common stock 35% 13.33% 4.67% Preferred shares 10% 10% 1.00% Debt 55% 3.90% 2.15% Total 100% 7.81%