5. Calculating WACC. 
Reactive Industries has the following capital structure. Its corporate
tax rate is 35 percent. What is its WACC?

Security 	Market Value 	Required Rate of Return
Debt 		$20 million	6%
Preferred stock $10 million 	8%
Common stock 	$50 million 	12%

Hi!!



WACC = wd*Kd*(1-Tax) + ws*Ks + wp*Kp ;

where:
wd = weight of debt = $20m/$80m = 0.250
ws = weight of common stocks = $50m/$80m = 0.625
wp = weight of preferred stocks = $10m/$80m = 0.125
Kd = cost of debt 
Ks = cost of stocks (rate of return)
Kp = cost of preferred stocks

Then WACC is:

WACC = 0.250*0.06*(1-0.35) + 0.625*0.12 + 0.125*0.08 =
     = 0,00975 + 0,075 + 0.01 =
     = 0,09475 = 9.475%

The WACC is 9.475% .


For references see the following document in MSWord format:
"The Cost of Capital":
http://www.exinfm.com/training/cost_of_capital.doc
and
"How do I calculate WACC?":
http://www.mtholyoke.edu/~aahirsch/howwacc.html

I hope that this helps you. Feel free to request for a clarification if you need it.

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Request for Answer Clarification by zimmy-ga on 05 Apr 2005 07:23 PDT

Hi livioflores- can you possibly answer my other questions (related to
Finance) today?  I have two questions posted.
THANK YOU SO MUCH!

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Clarification of Answer by livioflores-ga on 05 Apr 2005 08:39 PDT

Thank you for the good rating and the generous tip. Unfortunately I
cannot answer your questions until tonight, but other researchers are
working on them.

Regards.
livioflores-ga

Thank you so much for your quick response!!!!!