Tico Co. has a target capital structure of 20% preferred stock, 40% co

QUESTION

Tico Co. has a target capital structure of 20% preferred stock, 40% common, and 40% debt. It cost of equity is 12%, the cost of preferred stock is 6% and cost of debt if 5%. The relevant tax rate is 34%. What is Ticos weighted average cost of capital?
According to the given data, Preferredstock = 20% Commonstock = 40% Debtcomponent = 40% Cost ofequity = 12% Cost ofPreferred stock = 6% Cost ofdebt = 5% Tax rate =34% The formula for calculatingWACC is WACC =W d r d (1-T) W p r p W c r c Where Wd = weight of debt component Wp = weight of preferred stock Wc = weight of equity component r d = cost of

debt r p = cost ofpreferred stock r c = cost ofequity Now, substitutng the values in the above formula weget WACC= 0.4 X 0.05 X(1-0.34) 0.2 X 0.06 0.4 X 0.12 = 0.0132 0.012 0.048 = 0.0732 or 7.32% Conclusion : Hence,WACC for Tico co. is 7.32%

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