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Suppose that company A has the following capital structure: 25% Equity, 10% preferred stock...

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Finance

Suppose that company A has the following capital structure:

  • 25% Equity,
  • 10% preferred stock
  • 65% debt.

Its marginal cost of equity is 12%, its marginal cost of preferred stock is 9%, and its before-tax cost of debt is 7%.

Company B has the following capital structure:

  • 30% Equity,
  • 20% preferred stock,
  • 50% debt

Its marginal cost of equity is 11%, its marginal cost of preferred stock is 9%, its before-tax cost of debt is 8%.

Suppose the marginal tax rate is 35%.

a. Calculate the WACC for Company A (

b. Calculate the WACC for Company B

c. Analyse the results

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