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Copernicus Inc: Calculate WACC given a target capital structure

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WACC Problem - Copernicus Inc. has determined that its target capital structure will be 605 debt, 105 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 14% and the common stock is 16%. In addition, the company's marginal tax rate is 40%.

Based on the information provided, calculate the weight average cost of capital.

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Solution Preview

First, the total shares of debt+preferred stock = 1-0.3 = 0.7
Then share of debt is D = 0.7 * 605/(605+105) = 0.60
share of preferred stock is PS= 0.7 * 105/(605+105) = 0.10

WACC is a calculation ...

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