Question

Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8%. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. There are 40,000 shares of preferred stock outstanding at a market price of $34 a share. The bond issue has a total face value of $500,000 and sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of capital for Peter's Audio Shop? Group of answer choices 9.45%

Answer 1

Answer:

Explanation:

First, find the market values of each;

Equity = 104,000*20 = $2,080,000

Preferred stock =40,000*34 = $1,360,000

Debt = 1.02*500,000 = $510,000

TOTAL = 2,080,000 + 1,360,000 + 510,000 = 3,950,000

WACC = wE*rE + wP*rP + wD*(rD(1-tax))

wE =weight of equity = 2,080,000/3,950,000 = 0.527

rE= cost of equity = 11% or 0.11

wP= weight of Preferred stock = 1,360,000/3,950,000 = 0.344

rP =cost of preferred stock = 8% or 0.08

wD= weight of debt = 510,000/3,950,000 = 0.129

rD = cost of debt = 7% or 0.07

Therefore ,

WACC = (0.527 * 0.11) + (0.344 * 0.08) +(0.129 * (0.07(1-0.34))

WACC =0.05797 + 0.02752 + 0.0059598

WACC= 0.0914498 OR 9.14%

Answer 2

The weighted average cost of capital (WACC) is a measure of a company's total cost of capital, including common stock, preferred stock, bonds, and other types of debt. So, the WACC is 9.14%

What is weighted average capital?

$\text{Equity} = 104,000\text { x }20 \\\\\text{Equity} = 2,080,000\\\\\text{Preferred stock} = 40,000 \text{ x } 34 \\\\\text{Preferred stock} = 1,360,000\\\\\text{Debt} = 1.02 \text{ x }500,000 \\\\\text{ Debt} = 510,000$

$\text{TOTAL} = 2,080,000 + 1,360,000 + 510,000 = 3,950,000$

$\text{WACC} = \text{wE} \text{ x } \text{rE} + \text{wP} \text{ x } \text{rP} + \text{wD} \text{ x } (\text{rD}(1-\text{tax}))$

$\text{wE =weight of equity} \\\text{wE}= 2,080,000/3,950,000 \\\text{wE}= 0.527$

$\text{rE= cost of equity} \\\text{rE}= 0.11$

$\text{rE} = 11$%

$\text{wP= weight of Preferred stock} \\\text{wP}= 1,360,000/3,950,000 \\\text{wP}= 0.344$

$\text{rP =cost of preferred stock}\\ \text{rP} = 0.08$

$\text{rP} = 8$%

$\text{wD= weight of debt} \\\text{wD} = 510,000/3,950,000 \\\text{wD} =0.129$

$\text{rD}= cost of debt\\\text{rD}= 7$

Therefore,

$\text{WACC} = (0.527 \text{ x } 0.11) + (0.344 \text { x } 0.08) +(0.129 \text { x } (0.07(1-0.34))$

$\text{WACC} =0.05797 + 0.02752 + 0.0059598$

$\text{WACC= 0.0914498 OR } 9.14$ %

For more information about weighted average capital, refer below

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