Quantitative Problem: Barton Industries expects that its target capital structur
ID: 2789556 • Letter: Q
Question
Quantitative Problem: Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist of 40% debt, 5% preferred stock, and 55% common equity. Note that the firm's marginal tax rate is 40%. Assume that the firm's cost of debt, rd, is 6.5%, the firm's cost of preferred stock, rp, is 6% and the firm's cost of equity is 10.5% for old equity, rs, and 10.89% for new equity, re. What is the firm's weighted average cost of capital (WACC1) if it uses retained earnings as its source of common equity? Round your answer to 3 decimal places. Do not round intermediate calculations.
_______%
What is the firm’s weighted average cost of capital (WACC2) if it has to issue new common stock? Round your answer to 3 decimal places. Do not round intermediate calculations.
_______ %
Explanation / Answer
After tax cost of debt=6.5(1-0.4)=3.9%
1.WACC=Respective costs*respecive weights
=(0.4*3.9)+(0.05*6)+(0.55*10.5)
=7.635%
2.WACC==(0.4*3.9)+(0.05*6)+(0.55*10.89)
=7.850%(Approx)