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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
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%
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