3.8 WACC Practice Problem (80/92) -- Corporate Finance

3.8 WACC Practice Problem You are given the following problem. What is the firm’s WACC? LCM Corp. As of 12.31.20XX (000) | Long-Term Debt (LTD) | $250,000 | Corporate Tax Bracket | 21% | | Preferred Stock | 50,000 | Interest Rate in Debt | 5% | | Common Stock @ Par | 300,000 | Cost of Preferred Stock | 7% | | Additional Paid-in-Capital | 10,000 | Cost of Retained Earnings | 10% | | Retained Earnings | 500,000 | Cost of Common Stock | 12% | | Total Equity + LTD | $1,110,000 | Solution: Here is the formulation – do you agree? YOU do the calculation! WACC = (250/1,110) (.05) (1-.21) + (50/1,110) (.07) + (500/1,110) (.10) + (310/1,110) (.12) = ??? Question: What happens to the WACC if the firm raises more debt capital to fuel growth? Assume ceteris paribus. (The answer to the problem above is: WACC = 0.0906. Don’t tell anybody!)