Answer:
Cost of common stock (Ke) = 12.75%
Cost of preferred stocks (Kp) = $8.30/$97.50
= 0.0851 = 8.51%
Cost of debt = 8.23%
WACC = Ke(E/V) + Kp(P/V) + Kd(D/V)(1-T)
WACC = 12.75(2,898,000/4,109,690) + 8.51(736.125/4,109,690) + 8.23(475,565/4,109,690)
WACC = 8.99 + 1.52+ 0.95
WACC = 11.46%
Market value of the company: $
Market value of common stocks (34,500 x $84) 2,898,000
Market value of preferred stocks (7,550 x $97.50) 736,125
Market value of debt ( $419,000 x $113.5/$100) 475,565
Market value of the company 4,109,690
Explanation:
In the case, the cost of common stock and cost of debts are given. There is need to calculate cost of preferred stocks, which is the ratio of dividend to current market price of the preferred stocks. Dividend on preferred stocks is calculated as 8.30% x $100 par value, which is $8.30.
We also need to calculate the market value of the company, which is the aggregate of market value of common stock, market value of preferred stock and market value of debt,
WACC is calculated as the aggregate of cost of each stock and the proportion of the market value of each stock to the market value of the company.
