Question

Based on current market values, Shawn Supply's capital structure is 30% debt, 20% preferred stock, and 50% common stock. When using book values, capital structure is 25% debt, 10% preferred stock, and 65% common stock. The required return on each component is: debt,10% before tax; preferred stock, 11%; and common stock,18%. The marginal tax rate is 35%. What rate of return must Shawn Supply’s earn on its investments if the value of the firm is to remain unchanged?

Answer 1

$WACCм=0.3\times10(1-0.35)+0.2\times11+0.50\times18=13.15$

$WACCbv=0.25\times10(1-0.35)+0.1\times11+0.65\times18=14.425$

14.425