Targaryen Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 9 percent, the cost of preferred stock is 7 percent, and the pretax cost of debt is 8 percent. The relevant tax rate is 21 percent. a. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Targaryen Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 9 percent, the cost of preferred stock is 7 percent, and the pretax cost of debt is 8 percent. The relevant tax rate is 21 percent. a. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
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
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![### Targaryen Corporation's Capital Structure Analysis
Targaryen Corporation has a target capital structure consisting of the following components:
- 60 percent common stock
- 5 percent preferred stock
- 35 percent debt
The associated costs for each component are:
- Cost of equity: 9 percent
- Cost of preferred stock: 7 percent
- Pretax cost of debt: 8 percent
The relevant tax rate for the corporation is 21 percent, which impacts the after-tax cost of debt. Below are two key questions to be answered:
#### a. What is the company's WACC (Weighted Average Cost of Capital)?
*Note: Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places, e.g., 32.16.*
#### b. What is the after-tax cost of debt?
*Note: Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places, e.g., 32.16.*
To provide clear data entry points, we have used a placeholder table as shown below:
| Question | Description | Percentage (%) |
|---------|---------------------------|----------------|
| a. | WACC | |
| b. | After-tax cost of debt | |
### Explanation of Calculations:
1. **After-tax Cost of Debt Calculation:**
- Formula: \( \text{After-tax cost of debt} = \text{Pretax cost of debt} \times (1 - \text{Tax rate}) \)
- Substitute given values:
\( \text{After-tax cost of debt} = 8\% \times (1 - 0.21) \)
2. **WACC Calculation:**
- Formula:
\[
\text{WACC} = (W_e \times R_e) + (W_p \times R_p) + (W_d \times R_d \times (1 - \text{Tax Rate}))
\]
where:
- \( W_e \) = Weight of equity = 60%
- \( R_e \) = Cost of equity = 9%
- \( W_p \) = Weight of preferred stock = 5%
- \( R_p \) = Cost of preferred stock = 7%
- \( W_d \) = Weight of debt = 35%
- \( R_d \) =](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4075dd7b-7cf0-4080-a9ab-c20ff4793850%2F85ae63ae-e52b-4899-bfa8-7e657f62c807%2Fck3x6h5_processed.jpeg&w=3840&q=75)
Transcribed Image Text:### Targaryen Corporation's Capital Structure Analysis
Targaryen Corporation has a target capital structure consisting of the following components:
- 60 percent common stock
- 5 percent preferred stock
- 35 percent debt
The associated costs for each component are:
- Cost of equity: 9 percent
- Cost of preferred stock: 7 percent
- Pretax cost of debt: 8 percent
The relevant tax rate for the corporation is 21 percent, which impacts the after-tax cost of debt. Below are two key questions to be answered:
#### a. What is the company's WACC (Weighted Average Cost of Capital)?
*Note: Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places, e.g., 32.16.*
#### b. What is the after-tax cost of debt?
*Note: Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places, e.g., 32.16.*
To provide clear data entry points, we have used a placeholder table as shown below:
| Question | Description | Percentage (%) |
|---------|---------------------------|----------------|
| a. | WACC | |
| b. | After-tax cost of debt | |
### Explanation of Calculations:
1. **After-tax Cost of Debt Calculation:**
- Formula: \( \text{After-tax cost of debt} = \text{Pretax cost of debt} \times (1 - \text{Tax rate}) \)
- Substitute given values:
\( \text{After-tax cost of debt} = 8\% \times (1 - 0.21) \)
2. **WACC Calculation:**
- Formula:
\[
\text{WACC} = (W_e \times R_e) + (W_p \times R_p) + (W_d \times R_d \times (1 - \text{Tax Rate}))
\]
where:
- \( W_e \) = Weight of equity = 60%
- \( R_e \) = Cost of equity = 9%
- \( W_p \) = Weight of preferred stock = 5%
- \( R_p \) = Cost of preferred stock = 7%
- \( W_d \) = Weight of debt = 35%
- \( R_d \) =
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