Answer:
the company's WACC is 10.04%
Explanation:
Weighted Average Cost of Capital (WACC) is the minimum return that a project must offer before it can be accepted. It shows the risk of the company.
<em>Capital Source Market Value Weight Cost Total Weight</em>
Debt $8,400,000 27.71% 4.389 % 1.22%
Common stock $24,190,000 71.17% 12.2% 8.68%
Preferred stock $1,400,000 4.12% 3.5% 0.14%
Total $ 33,990,000 100.00% 10.04%
<u><em>Calculation of Market Value and Cost of Debt</em></u>
Market Value = 8,000×($1,000×105%) = $8,400,000
Cost of Debt = interest × (1 - tax rate)
= 5.7% × ( 1-0.23)
= 4.389 %
<u><em>Calculation of Market Value and Cost of </em></u><u>Common stock</u>
Market Value = 410,000× $59 = $24,190,000
Cost of Common stock = Risk free Rate + Beta × Market Premium
= 4.5% + 1.10× 7%
= 12.2%
<u><em>Calculation of Market Value and Cost of </em></u><u>Common stock</u>
Market Value = 17,500× $80 = $1,400,000
Cost of Preferred stock = 3.5%
