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6. Elway Electronics has debt with a market value of $350,000, preferred stock with a market...

6. Elway Electronics has debt with a market value of $350,000, preferred stock with a market value of $150,000, and common stock with a market value of $450,000. If debt has a cost of 8%, preferred stock has a cost of 10%, common stock has a cost of 12%, and the firm has a tax rate of 30%, what is the WACC?

a. 8.64%

b. 9.12%

c. 9.33%

d. 10.04%

PLEASE SHOW WORK

Solutions

Expert Solution

Total firm capital= $350,000 + $150,000 + $450,000

                                 = $950,000

Weight of debt in the capital structure= $350,000/ $950,000

                                                                          = 0.3684*100

                                                                          = 36.84%

Weight of preferred stock in the capital structure= $150,000/ $950,000

                                                                                               = 0.1579*100

                                                                                               = 15.79%

Weight of common stock in the capital structure= $450,000/ $950,000

                                                                                             = 0.4737*100

                                                                                             = 47.37%

The weighted average cost of capital is calculated using the below formula:

WACC=Wd*Kd(1-t)+Wps*Kps+We*Ke

where:

Wd= Percentage of debt in the capital structure.

Kd= The before tax cost of debt

Wps= Percentage of preferred stock in the capital structure

Kps=Cost of preferred stock

We=Percentage of common stock in the capital structure

Ke= The cost of common stock

T= Tax rate

WACC= 0.3684*8%*(1 – 0.30) + 0.1579*10% + 0.4737*12%

            = 2.0630% + 1.5790% + 5.6844%

            = 9.3253%

Hence, the answer is option b.

In case of any query, kindly comment on the solution.

jeff jeffy answered 10 months ago
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