Optimal Capital Structure Calculation for West Coast Bhd
Component Costs Calculation
Debt: The cost of debt (kd) is calculated as follows:
kd = [(10/100) × 1000 + (5/100) × 1000]/(1000 - (5/100) × 1000) = 5.68%
Preferred Shares: The cost of preferred shares (kp) is calculated using the formula:
kp = (12/100) × 100 + (1.50/100) × 100 - 10/100 × 110 = 11.10%
Common Shares: The cost of equity (ke) is calculated as:
ke = (2.5 × (1 + 6%))/22.50 × (1 - 0.10) + 6% = 13.47%
Weighted Average Cost of Capital (WACC) Calculation
The WACC is calculated using the formula:
WACC = wd kd (1 - T) + wp kp + we ke
Where, wd, wp, and we are the weight of debt, preferred stock, and common stock respectively, kd is the before-tax cost of debt, kp is the cost of preferred stock, ke is the cost of equity, and T is the tax rate.
To find the weight of each component, the following formulas are used:
Weight of debt = Book value of debt/Total capital
Weight of preferred shares = Market value of preferred shares/Total capital
Weight of common shares = Market value of common shares/Total capital
Using the given data, the weights are determined as follows:
Weight of Debt = 88.6%
Weight of Preferred Shares = 0.98%
Weight of Common Shares = 10.42%
With these weights, the WACC for West Coast Bhd is computed as:
WACC = 7.79%
Therefore, the firm's WACC is 7.79%.