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How do you calculate the WACC based on the target capital structure?

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Target capital structure will be at 60% debt, 10% preferred stock, and 30% common stock. As the financial manager, the CFO has informed you that the company's BEFORE tax cost of debt is 10%, preferred stock is at 14% and common stock is 16%. In addition, the company's marginal tax rate is 40%. Based on the info provided, calculate the WACC.

Please show ALL WORK, formulas, etc.

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Solution Preview

Step 1: Calculate the after tax cost of debt

Marginal Tax rate T = 40%
Pre tax cost of debt= kd= 10.00%
After tax cost of debt= kd(1-T)= 6.000% =(100% -40.%)*10.%

After tax cost of ...

Solution Summary

The solution shows the steps for determining WACC in plain text and in an attached Excel file.