The Expanding Capital Corporation has a current capital structure of $15 million in

secured bonds paying 6.5% annual interest, $10 million in preferred stock with a par
value of $50 per share and an annual dividend of $3.80 per share, and common stock
with a book value of $75 million. It is about to issue new debentures in the amount of
$10 million paying 7.5% annual interest. Its CFO says its marginal tax rate is 30%
and its cost of common equity capital is 12%. Calculate the company’s Weighted
Average Costs of Capital for the following:

1. Before the new bond issue

● Payable Bonds: 15,000,000
● Annual interest: 6.5%
● Preferred Stock: 10,000,000
● Per Value: $50 per share
● Annual Dividend: $3.80 per share = 3.80/50 = 7.6
● Common Stock: 75,000,000
● Cost of Common Equity: 12%

Total Cost of Capital = Payable Bonds + preferred stock + Common stock

Total Cost of Capital = 15,000,000 + 10,000,000 + 75,000,000

Total Cost of Capital =100,000,000

WACC = Re * (Equity/Total Value) + Rp *(Preferred Stock Value + Total capital) +

Rd * (1- T) * (Bond Value/ Total capital)

WACC = 12 * (75,000,000/100,000,000) + 7.6 * (10,000,000/100,000,000) + 6.5 *

(1-0.3) * (15,000,000/100,000,000)

WACC = 9 + 0.76 + 0.6825

WACC = 10.44

2. After the new bond issue

● New Debentures: 10,000,000
● Annual Interest: 7.5%
● Payable Bonds: 15,000,000
● Annual interest: 6.5%
● Preferred Stock: 10,000,000
● Per Value: $50 per share
● Annual Dividend: $3.80 per share = 3.80/50 = 7.6
 ● Common Stock: 75,000,000
● Cost of Common Equity: 12%

Total Cost of Capital = Payable Bonds + preferred stock + Common Stock + New
Debentures

Total Cost of Capital = 15,000,000 + 10,000,000 + 75,000,000 + 10,000,000

Total Cost of Capital = 110,000,000

WACC = 12 * (75,000,000/110,000,000) + 7.6 * (10,000,000/110,000,000) + 6.5 *

(1-0.3) * (15,000,000/110,000,000) + 7.5 * (1-0.3) * (10,000,000/110,000,000)

WACC = 8.18 + 0.69 + 0.62 + 0.48

WACC = 9.97

Reference

Hill, R.A. (2010). Strategic Financial Management: Part II - Finance & Wealth
Decisions. BookBoon: Ventus Publishing ApS. Available at
http://my.uopeople.edu/pluginfile.php/56304/mod_page/content/7/StrategicFinMgmtII
.pdf

Jeff, S. (2023, March, 4). CFI. WACC. What is WACC, its formula, and why it's used
in corporate finance. https://corporatefinanceinstitute.com/resources/valuation/what-
is-wacc-formula/