Francesco Totti Company FTC has target capital structure of

Francesco Totti Company (FTC) has target capital structure of 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 5.50%, the yield on the preferred is 7.00%, the cost of retained earnings is 11.50%, and the tax rate is 40%. The firm will not be issuing any new stock. What is FTC\'s WACC?

Solution

Weighted Average cost of Capital is calculated by providng weights to each type of capital source

Weight for Debt=35% tax rate =40%

Interest rate on new debt=5.5%

Actual Cost=5.5%(0.6)=3.3%

Wehigt for Preferred=10% , interest rate on preferred=7%

Actual cost from preferred=0.7%

Weight for Common Equity=55% interest rate of Equity =11.5%

Actual cost from equity=11.5%(0.55)=6.325%

WACC=6.325%+0.7%+3.3%=10.325%