Answer:
Ke = Rf + β(Rm – Rf)
ke = 2.2 + 1.32 (10.6 - 2.2)
Ke = 2.2 + 1.32(8.4)
ke = 2.2 + 11.088
ke = 13.288%
kp = D/Po
kp = $5.50/$64
Kp = 0.0859375 = 8.59375%
Kd = 6.7%
Kd after tax = 6.7(1-0.21) = 5.293
WACC = Ke(E/V) + kp(P/V) Kd(D/V)(1-T)
WACC = 13.288(3,075,000/12,419,500) + 8.59375(3,072,000/12,419500) + 5.293(6,272,500/12,419,500)
WACC = 3.29 + 2.126 + 2.6732
WACC = 8.09%
The correct answer is B
Market value of the company: $
Market value of equity = 75,000 x $41 = 3,075,000
Market value of preferred stock = 48,000 x $64 = 3.072,000
Market value of debt = 6500 x $96.5 = 6,272, 500
Market value of the company 12,419,500
The correct answer is B
Explanation:
In this question, we need to calculate cost of equity based on capital asset pricing model. Then, we will calculate cost of preferred stock as shown above. Thereafter, the after-tax cost of debt will be computed as illustrated above. We also need to calculate the market value of the company. Finally, we will calculate weighted average cost of capital as computed above.
