Question

Nipigon Manufacturing has a cost of debt of 7 %, a cost of equity of 12%, and a cost of preferred stock of 9%. Nipigon currently has 130,000 shares of common stock outstanding at a market price of $25 per share. There are 48,000 shares of preferred stock outstanding at a market price of $38 a share. The bond issue has a face value of $950,000 and a market quote of 104. The company’s tax rate is 35%.

Required:

Calculate the weighted average cost of capital for Nipigon. You must show and clearly label all calculations to receive full marks. You can either enter your calculations in the space provided

Answer 1

Given Data:

Cost of Equity (Ke) = 12%

Cost of debt (Kd) = 7%

After tax Cost of debt = 7% × (1–0.35) = 4.55%

Cost of preferred stock (Kp) = 9%

Numbers of common stock = 130,000

Market price of common stock = $25

Number of preferred stock = 48,000

Market price of preferred stock = $38

Face value of bond = $950,000

Market value of bond = 104% of face value

Tax Rate = 35%

 

Now Calculation of Market value of each component of WACC are as follows:

Market value of Equity = 130,000 × $25 = $3,250,000

Market value of preferred stock = 48,000 × $38 = $1,824,000

Market value of bond = $950,000 × 1.04 = $988,000

Total market Value of the firm = $3,250,000 + $1,824,000 + $988,000 = $6,062,000

 

Now the WACC are as follows.

WACC = (Ke × We) + (Kp × Wp) + (Kd × Wd)

WACC = (12% × 3,250,000 / 6,062,000) + (9% × 1,824,000 / 6,062,000) + (4.55% × 988,000 / 6,062,000)

WACC = 6.4335% + 2.7080% + 0.7416% = 9.88%

 

Thus, the WACC = 9.88%

Thus, the WACC = 9.88%