Calculation of Weighted Average Cost of Capital for Clay Industries

C

In order to calculate the WACC, it is necessary to first calculate the component after-tax cost of debt, common equity, and preferred equity. Once the cost of these components is determined, they are imputed into the WACC equation, which is as follows:

{WACC = [(% weight of debt securities * cost of debt) + (% weight of common stock * cost of common stock) + (% weight of preferred stock * cost of preferred stock)]}

To calculate the component cost of debt, use the following equation:

{After-tax cost of debt = [yield on outstanding debt securities * (1 - tax rate)}

Factoring in the given information into this equation would yield the following:

{After-tax cost of debt = [8.50% * (1 - 0.35%)]} = 5.525%

To calculate the component cost of outstanding preferred stock, the following equation must be used:

{Cost of preferred stock = [annual dividend / preferred stock price]}

{Cost of preferred stock - = [$2.55 / $25.97]} = 9.82%.

The final component of the WACC calculation, the cost of common equity, has been provided as 14.25%.

Now that the after-tax cost of debt, preferred stock, and common stock have been determined, the WACC calculation can be found. The calculation of the WACC is as follows:

{[0.50 * 0.05525] + [0.40 * 0.1425] + [0.10 * 0.0982]} = 9.445%