Barton industries expects that its target capital structure for raising funds in the future for its capital budget will consist of 40% debt, 5% preferred stock, and 55% common equity. note that the firm's marginal tax rate is 40%. assume that the firm's cost of debt, rd, is 6.9%, the firm's cost of preferred stock, rp, is 6.4% and the firm's cost of equity is 10.9% for old equity, rs, and 11.51% for new equity, re. what is the firm's weighted average cost of capital (wacc1) if it uses retained earnings as its source of common equity? round your answer to 3 decimal places. do not round intermediate calculations. 68.97 % what is the firm’s weighted average cost of capital (wacc2) if it has to issue new common stock? round your answer to 3 decimal places. do not round intermediate calculations.

a. With New Stock = 8.307%

b. With Old stock = 7.971%

Explanation:

The weighted average cost of capital (WACC) defines the cost rate that blends the capital structure cost including equity, debt, and preferred stock.

Requirement A

If it uses retained earnings as its source of common equity,

Given,

The weight of the combination of the capital structure is -

= 40% = 0.40; = 5% = 0.05; = 55% = 0.55

For cost of debt, we have to find cost of debt after tax, =

6.9% x (1 - 0.40) = 4.14%

Cost of preferred stock, = 6.4%

Cost of new Equity, = 11.51%

We know, the weighted average cost of capital (WACC) =

x + x + x

= (0.40 x 4.14%) + (0.05 x 6.4%) + (0.55 x 11.51%)

= 1.656% + 0.32% + 6.3305%

= 8.307%

Requirement B

If it has to issue new common stock, the weighted average cost of capital (WACC) = x + x + x

Given,

The weight of the combination of the capital structure is -

= 40% = 0.40; = 5% = 0.05; = 55% = 0.55

For cost of debt, we have to find cost of debt after tax, =

6.9% x (1 - 0.40) = 4.14%

Cost of preferred stock, = 6.4%

Cost of new Equity, = 10.9%

Therefore, putting the value in the equation,

WACC = (0.40 x 4.14%) + (0.05 x 6.4%) + (0.55 x 10.9%)

WACC = 1.656% + 0.32% + 5.995%

WACC = 7.971%

answer; (cash) is the best out of the above; good luck

the answer would be voluntary exchange -

"the act of buyers and sellers freely and willingly engaging in market transactions. moreover, transactions are made in such a way that both the buyer and the seller are better off after the exchange than before it occurred."

hope this : )

-shy