Respuesta :
Tencent Corporation's target capital structure is 70 percent common stock, 5 percent preferred stock, and 25 percent debt. This means that for every $100 of capital, $70 will come from common stock, $5 will come from preferred stock, and $25 will come from debt.
Tencent's cost of equity is 11 percent, which means that investors expect to earn an 11 percent return on their investment in the company's common stock.
The cost of preferred stock is 5 percent, which means that investors expect to earn a 5 percent return on their investment in the company's preferred stock. The pretax cost of debt is 6 percent, which means that the company must pay an interest rate of 6 percent on its borrowed funds.
The relevant tax rate is 23 percent, which means that the company will have to pay 23 percent of its income in taxes. This will affect the cost of its borrowed funds, since the interest paid on debt is tax-deductible.
The after-tax cost of debt is equal to the pretax cost of debt multiplied by (1 - tax rate), which in this case is 6 percent * (1 - 0.23) = 4.62 percent.
To calculate the company's weighted average cost of capital (WACC), we need to determine the proportion of each type of capital in the company's target capital structure and multiply it by the cost of that type of capital.
The proportion of common stock is 70 percent, and the cost of common stock is 11 percent, so the weighted cost of common stock is 70 percent * 11 percent = 7.7 percent.
The proportion of preferred stock is 5 percent, and the cost of preferred stock is 5 percent, so the weighted cost of preferred stock is 5 percent * 5 percent = 0.25 percent. The proportion of debt is 25 percent, and the after-tax cost of debt is 4.62 percent, so the weighted cost of debt is 25 percent * 4.62 percent = 1.155 percent.
Finally, we can add up the weighted cost of each type of capital to get the company's WACC:
WACC = 7.7 percent + 0.25 percent + 1.155 percent = 9.115 percent
This means that, on average, investors expect to earn a 9.115 percent return on their investment in Tencent Corporation.
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