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\AllCity, Inc., is financed 40% with debt, 8% with preferred stock, and 52% with common stock. Its cost of debt is 5.7%, its preferred stock pays an annual dividend of $2.49 and is priced at $30. It has an equity beta of 1.15. Assume the risk-free rate is 1.7%, the market risk premium is 7.3% andAllCity's tax rate is 35%. What is its after-tax WACC? [Note: Assume that the firm will always be able to utilize its full interest tax shield.]

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Answer:

WACC = 6.38%

Explanation:

Cost of equity = 1.7% + (1.15 x 5.6%) = 8.14%

Weight of equity = 52%

After tax cost of debt = 5.7% x (1 - 35%) = 3.705%

Weight of debt = 40%

Cost of preferred stock = $2.49 / $30 = 8.3%

Weight of preferred stock = 8%

WACC = (8.14% x 0.52) + (3.705% x 0.4) + (8.3% x 0.08) = 6.3788% ≈ 6.38%

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