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emmasim [6.3K]
3 years ago
9

32,500 shares of common stock outstanding at a price per share of $80 and a rate of return of 12.95 percent. The firm has 7,350

shares of 7.90 percent preferred stock outstanding at a price of $95.50 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $407,000 and currently sells for 111.5 percent of face. The yield to maturity on the debt is 8.11 percent and the bonds have a coupon rate of 5.6 percent. What is the firm's weighted average cost of capital if the tax rate is 40 percent?
Business
1 answer:
pashok25 [27]3 years ago
4 0

Answer:

WACC = 11.1%

Explanation:

The weighted Average cost of Capital is the average cost of capital for the different sources of long-term capital available to a firm weighted according to the proportion each source of finance bears to the total capital in the pool.

<em>Market of securities</em>

Common stock =  $80 × 32,500=  2,600,000.  

Preferred stock = $95.50 ×  7,350=   701,925.00  

Bond = 407,000/100 × 111.5= 453,805.00  

<em>Cost of each capital type</em>

Common stock= 12.95

Preferred stock = (7.90%× 100)/95.50= 8.3%

Bond= 8.11%× (1-0.4)=4.87%

<em>WACC</em>

Type                      Market Value          Cost           Market value  cost

Common stock   2,600,000.              12.95%         336,700.00  

Preferred            701,925.00              8.3%             58,065.00  

Bond                   4<u>53,805.00  </u>           4.87%            <u>22,100.30 </u>

Total                    <u>3,755,730.00</u>                               <u>  416,865.30</u>  

WACC = (416,865.30  / 3,755,730.00) ×  100

       = 11.1%

WACC = 11.1%

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