question archive Feast Inc

Feast Inc

Subject:FinancePrice:2.86 Bought3

Feast Inc. plans to maintain its optimal capital structure of 40% debt, 10% preferred stock, and 50% common equity indefinitely.  The pre-tax required return on each component source of capital is as follows: debt ------ 8%; preferred stock ------ 12%; common equity ------ 16%.  Assuming a 40% marginal tax rate, what after-tax weighted average cost of capital can we infer for the firm?

 

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  • Cost of Debt = Required Return (1 - tax rate)
  • Cost of Debt = 8% (1 - 40%)
  • Cost of Debt = 4.8%

 

  • Preferred Stock = 12%

 

  • Common Stock = 16%

 

  • WACC = 4.8%(40%) + 12%(10%) + 16%(50%)
  • WACC = 1.92% + 1.2% + 8%
  • WACC = 11.12%