Reactive power generation has the following capital structure. its corporate tax rate is 40%. security market value required rate of return debt $ 30 million 4 % preferred stock 30 million 6 common stock 40 million 10 what is its wacc? (do not round intermediate calculations. enter your answer as a percent rounded to 2 decimal places.)

The WACC is 6.52%

Explanation:

The formula to compute WACC is shown below:

= Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of  common stock) × (cost of common stock)

where,  

Weighted of debt = Debt ÷ total firm

The total firm includes debt, preferred stock, and the equity which equals to

= $30 million + $30 million + $40 million

= $100 million  

So, Weighted of debt = ($30 million ÷ $100 million) =0.3

So, the weight of preferred stock = (Preferred stock ÷ total firm)

                                                     = $30 million ÷ $100 million

                                                     = 0.3  

And, the weighted of common stock = (Common stock ÷ total firm)

                                                              = $40 million ÷ $100 million

                                                              = 0.4              

Now put these values to the above formula  

So, the value would equal to

= (0.3 × 4%) × ( 1 - 40%) +  (0.3 × 6%) +  (0.4 × 10%)

= 0.72% + 1.8% + 4%

= 6.52%

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