Weighted Average Cost of Capital (WACC) is the required
An optimal capital structure of a company is a mix of debt, equity and preferred stock which can be used to maximize the company’s stock price. Therefore, a target proportion of capital structure and cost of each financing can be used to determine the WACC of the company.
Here,
Proportion of debt in the target capital structure “
Proportion of preferred stock in the target capital structure “
Proportion of equity in the target capital structure “
After tax cost of debt, preferred stock,
The company’s capital structure is 40% debt and 60% equity. YTM on new bonds is 5%, cost of retained earnings and new common stock is 8% and 11% respectively.
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