If the returns required by investors are 11 percent, 12 percent, and 15 percent for the debt, preferred stock, and common stock, respectively, what is Capital’s after-tax WACC?

The weighted average cost of capital (WACC) is a measure of the overall cost associated with a company’s capital structure. In order to calculate Capital Co.’s after-tax WACC, we must first determine the required returns for each component of their capital structure, which are 11 percent, 12 percent, and 15 percent for debt, preferred stock, and common stock respectively.

Next, we must consider the tax rate since some components like interest payments on debt are tax deductible while others like dividend payments on preferred or common stocks are not. For this calculation we will use a corporate tax rate of 25%.

Lastly, we can multiply each component’s return by its corresponding weighting factor (debt 28%, preferred 19%, and common stock 53%) and add them together to arrive at our desired value: 0.28(11%) x (1-0.25) + 0.19(12%) + 0.53(15%) = 10.7%. Therefore, Capital Co.’s after-tax WACC is 10.7%.