21.07.2022 - 14:57

# Healthy Snacks, Inc. has a target capital structure of 55 percent common stock, 5 percent preferred stock, and 40 percent debt. Its cost of equity is 14.3 percent, the cost of preferred stock is 8.9 p

Question:

Healthy Snacks, Inc. has a target capital structure of 55 percent common stock, 5 percent preferred stock, and 40 percent debt. Its cost of equity is 14.3 percent, the cost of preferred stock is 8.9 percent, and the pretax cost of debt is 8.1 percent. What is the company’s WACC if the applicable tax rate is 35 percent?

• The WACC (weighted average cost of capital) for Healthy Snacks, Inc. can be calculated using the formula: WACC = (E/V x Re) + (P/V x Rp) + (D/V x Rd x (1 - T)) Where: E = market value of equity P = market value of preferred stock D = market value of debt V = total market value of the firm (E + P + D) Re = cost of equity Rp = cost of preferred stock Rd = pretax cost of debt T = tax rate Using the information given: E/V = 55% Re = 14.3% P/V = 5% Rp = 8.9% D/V = 40% Rd = 8.1% T = 35% To find the market values of equity, preferred stock, and debt, we need more information. Let's assume that the total market value of the firm is $100 million. Then, we can calculate: E = 0.55 x$100 million = $55 million P = 0.05 x$100 million = $5 million D = 0.40 x$100 million = $40 million V =$55 million + $5 million +$40 million = \$100 million Plugging in the numbers, we get: WACC = (0.55 x 0.143) + (0.05 x 0.089) + (0.40 x 0.081 x (1 - 0.35)) WACC = 0.07865 or 7.865% Therefore, the WACC for Healthy Snacks, Inc. is 7.865%. This means that the company needs to earn a return of at least 7.865% on its investments to satisfy its investors and lenders. Any investments that generate a return below this rate could potentially harm the company's value.