Question

An all-equity company has common and preferred shares. There are 250,000 common shares outstanding with a price of $31.30 per share and with an expectation to continue to provide a dividend of $4.75 per share. There are 50,000 preferred shares outstanding, with a 3.10% dividend, $100 par value per share, and $61.80 market value per share. Given this information, what is the company's WACC?

a) 13.53 %

b) 12.91%

c) 13.22 %

d) 12.61 %

e)12.30 %

Answer 1

Cost of equity shares = dividend / price
=$4.75/31.30
=15.18%
Cost of preferred stock = Dividend / market price
=$3.10/61.80
=5.02%
Value of equity = 250000*$31.30 =$7825000
Value of preferred stock = 50000*$61.80 =3090000
Mode	Value	Weight	Cost	WACC
a	b	c =b/10915000	d	e=c*d
Common stock	$              78,25,000	0.72	15.18%	10.88%
Preferred stock	$              30,90,000	0.28	5.02%	1.42%
Total	$          1,09,15,000	1.00		12.30%
Correct Answer = e)12.30%