Targaryen Corporation has a target capital structure of 75 percent common stock, 10 percent preferred stock, and 15 percent debt. Its cost of equity is 10 percent, the cost of preferred stock is 6 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 22 percent.

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Question:

Targaryen Corporation has a target capital structure of 75 percent common stock, 10 percent preferred stock, and 15 percent debt. Its cost of equity is 10 percent, the cost of preferred stock is 6 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 22 percent.

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Answer:a. 8.92%b. 5.46%Explanation:a. What is the company’s WACCb. What is the aftertax cost of debt?a. After tax cost of debt = 7%*(1-tax rate)=0.07*(1-0.22)= 0.07 * 0.78= 0.0546= 5.46%Thus, WACC =Respective costs*Respective weightWACC = (0.75*10)+(0.1*6)+(0.15*5.46)WACC = 8.919%WACC = 8.92%b. The After tax cost of debt from above is = 5.46%

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