Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

AllCity, Inc., is financed 42% with debt, 15% with preferred stock, and 43% with common stock. Its pretax cost of debt is 5.6%, its preferred

image text in transcribedimage text in transcribed

AllCity, Inc., is financed 42% with debt, 15% with preferred stock, and 43% with common stock. Its pretax cost of debt is 5.6%, its preferred stock pays an annual dividend of $2.48 and is priced at $32. It has an equity beta of 1.19. Assume the risk-free rate is 1.7%, the market risk premium is 7.2% and AllCity's tax rate is 25%. What is its after-tax WACC? Note: Assume that the firm will always be able to utilize its full interest tax shield. The WACC is \%. (Round to two decimal places.) AllCity, Inc., is financed 36% with debt, 8% with preferred stock, and 56% with common stock. Its pretax cost of debt is 6.2%, its preferred stock pays an annual dividend of $2.47 and is priced at $32. It has an equity beta of 1.14. Assume the risk-free rate is 1.9%, the market risk premium is 7.3% and AllCity's tax rate is 25%. What is its after-tax WACC? Note: Assume that the firm will always be able to utilize its full interest tax shield. The required return of the preferred stock is: rpfdrpfd=PriceofPreferredStockDividends=$32$2.47=7.72% The required return of the equity is: rE=Risk-FreeRate+EquityBetaMarketRiskPremiumrE=1.9%+(1.147.3%)=10.22% The WACC is expressed as: rWacc=rEE%+rpfdP%+rD(1TC)D% where rwacc is the weighted average cost of capital, rE is the required return (cost of capital) of levered equity, rpfd is the required return (cost of capital) for preferred stock, rD is the required return (cost of capital) for debt, TC is the marginal corporate tax rate, and E%,P%, and D% are the fractions of the firm financed with equity, preferred stock, and debt, respectively. rwacc=(10.22%0.56)+(7.72%0.08)+[6.2%(10.25)0.36]=8.01%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Principles Of Managerial Finance

Authors: Chad Zutter, Scott Smart

16th Global Edition

1292400641, 978-1292400648

More Books

Students also viewed these Finance questions

Question

4. Think of analogies that will make ideas easier to understand.

Answered: 1 week ago