Question

The following market information was gathered for the Rogue Corporation. The firm has​ 5,000 bonds​ outstanding, each selling for​ $1,050.00 with a required rate of return of​ 7.00%. Rogue has​ 3,000 shares of preferred stock​ outstanding, selling for​ $60.00 per share and​ 80,000 shares of common stock​ outstanding, selling for​ $24.00 per share. If the preferred stock has a required rate of return of​ 9.00% and the common stock requires a​ 11.00% return, and the firm has a corporate tax rate of​ 20%, calculate the​ firm's WACC adjusted for taxes.

Answer 1

Weight of capital components to total market value

Capitals	Number of Bonds/Shares	Market Value per Bond/Share	Market Value [ Number of Bonds or Shares x Market Value per Bond or Share	Weight to total market value [Market Value / Total Capital]
Bond	5,000	1,050	52,50,000	0.7143
Preferred Stock	3,000	60	1,80,000	0.0245
Common Stock	80,000	24	19,20,000	0.2612
			73,50,000	1.0000
TOTAL			73,50,000	1.0000

Rogue Corporation’s Weighted Average Cost of Capital (WACC)

Weighted Average Cost of Capital (WACC) = [After Tax Cost of Debt x Weight of Debt] + [Cost of Preferred stock x Weight of preferred stock] + [Cost of equity x Weight of Equity]

= [7.00%(1 – 0.20) x 0.7143] + [9.00% x 0.0245] + [11.00% x 0.2612]

= [5.60% x 0.7143] + [9.00% x 0.0245] + [11.00% x 0.2612]

= 4.00% + 0.22% + 2.87%

= 7.09%

“Hence, the Weighted Average Cost of Capital (WACC) adjusted for taxes will be 7.09%”