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Mitchell, Inc
Mitchell, Inc. has $850,000 in debt with an average cost of 6.5%. The firm has shareholder equity of $320,000. Currently, Mitchell, Inc. has a Beta of 1.7. The SP500 returns 11% and the T-Bill rate is 3%. The firm also had $80,000 in preferred stock. The preferred sells at $26.50/share and pays a dividend of $3.25/share. Mitchell, Inc. is in the 25% tax bracket. What is the weighted average cost of capital for Mitchell, Inc?
Expert Solution
After-tax Cost of Debt = 6.50% * (1 - 0.25) = 4.875% ; Market value of debt = $850,000
Cost of Equity = 3% + [1.70 * (11% - 3%) = 16.60% ; $320,000
Cost of preferred stock = 3.25 / $26.50 = 12.26415% ; $80,000
Total value = [850000+320000+80000]
Weight of Debt = 850,000 / 1,250,000 = 0.68
Weight of Equity = 320,000 /1250000 = 0.256
Weight of preferred stock = 80,000 / 1,250,000 = 0.064
WACC = [4.875% * 0.68] + [0.256 * 16.60%] + [0.064 * 12.26415%]
WACC = 8.35%
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