Suppose that MNINK Industries' capital structure features 63 percent equity, 7 percent preferred stock, and 30 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 11.60 percent, 9.50 percent, and 9 percent, respectively. What is MNINK's WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield? (Round your answer to 2 decimal places.) WACC %
Suppose that MNINK Industries' capital structure features 63 percent equity, 7 percent preferred stock, and 30 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 11.60 percent, 9.50 percent, and 9 percent, respectively. What is MNINK's WACC if the firm faces an average tax rate of 21 percent and can make full use of the interest tax shield? (Round your answer to 2 decimal places.) WACC %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![**Understanding Weighted Average Cost of Capital (WACC)**
---
### Scenario:
Suppose that MNINK Industries’ capital structure consists of:
- 63% Equity
- 7% Preferred Stock
- 30% Debt
Assume the before-tax component costs are:
- Cost of Equity: 11.60%
- Cost of Preferred Stock: 9.50%
- Cost of Debt: 9%
### Task:
Calculate MNINK’s Weighted Average Cost of Capital (WACC) assuming an average tax rate of 21% and full utilization of the interest tax shield.
### Important:
Round your answer to 2 decimal places.
**Input Graph/Diagram Explanation:**
There is a simple input box labeled "WACC" to enter the calculated Weighted Average Cost of Capital percentage, followed by a percentage sign (%).
---
Weighting the costs of equity, preferred stock, and debt according to their respective proportions in the capital structure, and adjusting the cost of debt for the tax shield, allows us to determine the firm’s overall cost of capital. Understanding and calculating WACC helps in making informed financial decisions and evaluating investment opportunities effectively.
---
**Formula for WACC:**
\[ \text{WACC} = \left(\frac{E}{V} \times R_E\right) + \left(\frac{P}{V} \times R_P\right) + \left(\frac{D}{V} \times R_D \times (1 - T)\right) \]
Where:
- \( E \) = Market value of equity
- \( P \) = Market value of preferred stock
- \( D \) = Market value of debt
- \( V \) = \( E + P + D \) (Total market value of the firm’s financing: equity, preferred stock, and debt)
- \( R_E \) = Cost of equity
- \( R_P \) = Cost of preferred stock
- \( R_D \) = Cost of debt
- \( T \) = Tax rate
By applying the given data in this formula, one can compute the accurate WACC.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F42077dd4-5a93-4885-bc7c-dca1203ecd7a%2F60d45d20-8d77-4c36-b551-93c66c8f0a65%2F1wxsmq_processed.png&w=3840&q=75)
Transcribed Image Text:**Understanding Weighted Average Cost of Capital (WACC)**
---
### Scenario:
Suppose that MNINK Industries’ capital structure consists of:
- 63% Equity
- 7% Preferred Stock
- 30% Debt
Assume the before-tax component costs are:
- Cost of Equity: 11.60%
- Cost of Preferred Stock: 9.50%
- Cost of Debt: 9%
### Task:
Calculate MNINK’s Weighted Average Cost of Capital (WACC) assuming an average tax rate of 21% and full utilization of the interest tax shield.
### Important:
Round your answer to 2 decimal places.
**Input Graph/Diagram Explanation:**
There is a simple input box labeled "WACC" to enter the calculated Weighted Average Cost of Capital percentage, followed by a percentage sign (%).
---
Weighting the costs of equity, preferred stock, and debt according to their respective proportions in the capital structure, and adjusting the cost of debt for the tax shield, allows us to determine the firm’s overall cost of capital. Understanding and calculating WACC helps in making informed financial decisions and evaluating investment opportunities effectively.
---
**Formula for WACC:**
\[ \text{WACC} = \left(\frac{E}{V} \times R_E\right) + \left(\frac{P}{V} \times R_P\right) + \left(\frac{D}{V} \times R_D \times (1 - T)\right) \]
Where:
- \( E \) = Market value of equity
- \( P \) = Market value of preferred stock
- \( D \) = Market value of debt
- \( V \) = \( E + P + D \) (Total market value of the firm’s financing: equity, preferred stock, and debt)
- \( R_E \) = Cost of equity
- \( R_P \) = Cost of preferred stock
- \( R_D \) = Cost of debt
- \( T \) = Tax rate
By applying the given data in this formula, one can compute the accurate WACC.
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