Question

Wayco Industrial Supply has a pretax cost of debt of 8.3 percent, a cost of equity of 14.7 percent, and a cost of preferred stock of 8.9 percent. The firm has 165,000 shares of common stock outstanding at a market price of $33 a share. There are 15,000 shares of preferred stock outstanding at a market price of $43 a share. The bond issue has a face value of $750,000 and a market quote of 101. The company's tax rate is 21 percent. What is the weighted average cost of capital?

Answer 1

Answer:

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

WACC = 14.7(5,445,000/6,847,500)  + 8.9(645,000/6,847,500) + 8.3(757,500/6,847,500)(1-0.21)

WACC = 11.69 +  0.84 +  0.73

WACC = 13.18%

Market value of the company:                                           $

Market value of common stock (165,000 x $33)    =  5,445,000

Market value of preferred stocks (15,000 x $43) =  645,000                                                                                                                                                            

Market value of bond ($750,000 X 101/100)        =   757,500

Market value of the company                                        6,847,500

Explanation:

In this case, the cost of each stock is given. Then, we will calculate the market value of the company, which is the aggregate of market value of common stock, market value of preferred stocks and market value of debt.

WACC is calculated as the aggregate of cost of each stock and the proportion of market value of each stock to market value of the company.