Question

Wayco Industrial Supply has a pre-tax cost of debt of 7.6 percent, a cost of equity of 14.3 percent, and a cost of preferred stock of 8.5 percent. The firm has 220,000 shares of common stock outstanding at a market price of $27 a share. There are 25,000 shares of preferred stock outstanding at a market price of $41 a share. The firm has 1000 bonds that have a face value of $1,000 each and a market price of $1,012. The company's tax rate is 37 percent. What is the firm's weighted average cost of capital? A. 10.18 percent B. 13.1 percent C. 12.81 percent D. 12.35 percent

Answer 1

Debt:

Number of bonds outstanding = 1,000
Current Price = $1,012

Value of Debt = 1,000 * $1,012
Value of Debt = $1,012,000

Before-tax Cost of Debt = 7.60%
After-tax Cost of Debt = 7.60% * (1 - 0.37)
After-tax Cost of Debt = 4.788%

Preferred Stock:

Number of shares outstanding = 25,000
Current Price = $41

Value of Preferred Stock = 25,000 * $41
Value of Preferred Stock = $1,025,000

Cost of Preferred Stock = 8.50%

Equity:

Number of shares outstanding = 220,000
Current Price = $27

Value of Common Stock = 220,000 * $27
Value of Common Stock = $5,940,000

Cost of Common Equity = 14.30%

Value of Firm = Value of Debt + Value of Preferred Stock + Value of Common Stock
Value of Firm = $1,012,000 + $1,025,000 + $5,940,000
Value of Firm = $7,977,000

Weight of Debt = $1,012,000/$7,977,000
Weight of Debt = 0.1269

Weight of Preferred Stock = $1,025,000/$7,977,000
Weight of Preferred Stock = 0.1285

Weight of Common Stock = $5,940,000/$7,977,000
Weight of Common Stock = 0.7446

WACC = Weight of Debt*After-tax Cost of Debt + Weight of Preferred Stock*Cost of Preferred Stock + Weight of Common Stock*Cost of Common Stock
WACC = 0.1269*4.788% + 0.1285*8.50% + 0.7446*14.30%
WACC = 12.35%