To calculate the Weighted Average Cost of Capital (WACC) for Cream and Crimson Foods, we use the following formula:
\[ \text{WACC} = \left( w_d \times r_d \times (1 - T) \right) + \left( w_{ps} \times r_{ps} \right) + \left( w_e \times r_e \right) \]
Where:
- \( w_d \) = weight of debt
- \( r_d \) = cost of debt
- \( T \) = tax rate
- \( w_{ps} \) = weight of preferred stock
- \( r_{ps} \) = cost of preferred stock
- \( w_e \) = weight of equity
- \( r_e \) = cost of equity
Given Data:
- Weight of Debt (\( w_d \)): 42.00% or 0.42
- Cost of Debt (\( r_d \)): 12.00% or 0.12
- Tax Rate (\( T \)): 40.00% or 0.40
- Weight of Preferred Stock (\( w_{ps} \)): 3.00% or 0.03
- Cost of Preferred Stock (\( r_{ps} \)): 10.76% or 0.1076
- Weight of Common Equity (\( w_e \)): 55.00% or 0.55
- Cost of Common Equity (\( r_e \)): 12.22% or 0.1222
Step-by-Step Calculation:
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Calculate the after-tax cost of debt: \[ r_d(1 - T) = 0.12 \times (1 - 0.40) = 0.12 \times 0.60 = 0.072 \]
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Calculate each component of WACC:
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Cost of Debt component: \[ w_d \times r_d \times (1 - T) = 0.42 \times 0.072 = 0.03024 \]
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Cost of Preferred Stock component: \[ w_{ps} \times r_{ps} = 0.03 \times 0.1076 = 0.003228 \]
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Cost of Common Equity component: \[ w_e \times r_e = 0.55 \times 0.1222 = 0.06721 \]
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Add all components together to find WACC: \[ \text{WACC} = 0.03024 + 0.003228 + 0.06721 = 0.100678 \]
Final Result:
\[ \text{WACC} \approx 0.10068 \text{ or } 10.07% \]
Therefore, the Weighted Average Cost of Capital (WACC) for Cream and Crimson Foods is approximately 10.07%.
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