Question

TJ Industries has 7 million shares of common stock outstanding with a market price of $20.00 per share. The company alsohas outstanding preferred stock with a market value of $10 million, and 100,000 bonds outstanding, each with face value$1,000 and selling at 95% of par value. The cost of equity is 12%, the cost of preferred is 10%, and the cost of debt is6.45%. If US tax rate is 34%, what is the WACC?A. 8.92%B. 9.76%C. 1259%D. 13.43%

Answer 1

Answer:

WACC = Ke(E/V) + Kp(P/V) + Kd(D/V)(1-T)

WACC = 12(140,000,000/159,500,000) + 10(10,000,000/159,500,000) + 6.45(9,500,000/159,500,000)(1-0.34)

WACC = 10.53 + 0.63 + 0.38

WACC = 11.54%

Market value of the company:                                            $

Market value of common stocks (7,000,000 x $20)  140,000,000

Market value of preferred stocks                                 10,000,000

Market value of bonds (100,000 x  $950)                    9,500,000

Market value of the company                                        159,500,000

Explanation:

In this question, there is need to calculate the market value of the company, which is the sum of market value of common stocks, market value of preferred stocks and market value of bonds.

Cost of each stock is given in the question. Thus, WACC is calculated as the aggregate of cost of each stock an the proportion of market value of each stock to market value of the company.