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WACC of firm

A Company finances its projects with 40% debt, 10% preferred stock, and 50% common stock.

- The company can issue bonds at a YTM of 8.4%.
- The cost of preferred stock is 9%.
- The risk-free rate is 6.57%.
- The market risk premium is 5%.
- Johnson Industries' beta is equal to 1.3.
- Assume that the firm will be able to use retained earnings to fund the equity portion of its capital budget.
- The company's tax rate is 30%.

What is the company's WACC?

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Solution Preview

Step I Find out Ke:
Ke = Rf+b(Km-Rf)=13.07%

Ke= Cost of Equity capital

Rf= Risk ...

Solution Summary

This solution calculates a firm's WACC given information on bonds, preferred stock cost, risk-free rate, market risk premium, beta and equity.