[Busmommy]

Reading Foods in interested in calculating its weighted average cost of capital (W.A.C.C.) The company's C.F.O. has collected the following information:
1. The target capital structure consists of 40% debt and 60% common stock.
2. The company has 20-year non-callable bonds with a part value of $1,000, a 9% annual coupon, and a price of $1075.
3. Equity flotation costs are 2%.
4. The company's common stock has a beta of .8
5. The risk-free rate is 5%.
6. The market risk premium is 4%.
7. The company's tax rate is 40%.
8. The company plans to use retained earnings to finance the equity of portion of its capital structure, so it does not intend to issue any new common stock.

What is the company's W.A.C.C.

[Busmommy]

Po= 1075.00
F=2%
Rrf=5%
Rpm=4%
Rm=9%
b= .8
rs= 5+(4)(.8)= 8.2%
after tax cost of debt= 8.22(1-.40)= 4.932

W.A.C.C.=
(% of debt)(after tax cost of debt)+ (% of preferred stock)(cost of preferred stock)+ (% of common equity)(cost of common equity)=
(.60)(4.932)+ (0)(0)+ (.60)(8.2)= 6.893%

I am uncertain on my calculations. Any help would be appreciated. Thank you.

[ArcSine]

Spot on -- well done!

[Busmommy]

Thank you so very much for your help. I am beyond appreciative.

[ArcSine]

You're welcome, but you flew this mission completely solo. I didn't do anything except raise a toast to your successful landing.

Happy to help, and I appreciate your tip o' the cap. ;)