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Using market value and book value (separately), find the adjusted WACC, using 30% tax rate. Component...

Using market value and book value (separately), find the adjusted WACC, using 30% tax rate. Component Balance Sheet Value Market Value Cost of Capital TAX Debt 5,000,000.00 6,850,000.00 8% 30% Preferred Stock 4,000,000.00 2,200,000.00 10% Common Stock 2,000,000.00 5,600,000.00 13% ANSWER Book Value Weights Market Value Weights Adjusted WACC Debt Debt Market Value Preferred Stock Preferred Stock Book Value Common Stock Common Stock

Solutions

Expert Solution

a)8.55%
Statement showing computation basis book Value
Particulars Book Value Weight Cost WACC
Long term Debt        5,000,000.00                         0.4545 5.60% 2.55%
Preferred stock        4,000,000.00                         0.3636 10.00% 3.64%
Common Stock Equity        2,000,000.00                         0.1818 13.00% 2.36%
     11,000,000.00                         1.0000 8.55%
b) WACC is 9.09%
Statement showing computation basis market Value
Particulars Market Value Weight Cost WACC
Long term Debt        6,850,000.00                         0.4676 5.60% 2.62%
Preferred stock        2,200,000.00                         0.1502 10.00% 1.50%
Common Stock Equity        5,600,000.00                         0.3823 13.00% 4.97%
     14,650,000.00                         1.0000 9.09%

jeff jeffy answered 2 years ago
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