Question

Calculate the WACC for the following data: A company raised $100,000,000. $50,000,000 came from the sale of bonds which have a current yield of 8%. $25,000,000 came from the sale of common stock which has a cost equal to 9%. The final $25,000,000 came from the sale of preferred stock which has a cost equal to 10%. The company's tax rate is 30%.

Question 32 options:

A)
7.55%

B)
9.17%

C)
9.00%

D)
8.00%

Answer 1

Answer:

WACC = 7.55 %

so correct option is A) 7.55%

Explanation:

given data

company raised = $100,000,000

sale of bonds = $50,000,000

current yield = 8%

sale of common stock = $25,000,000

cost equal = 9%

sale of preferred stock =$25,000,000

cost equal = 10%

tax rate = 30%

to find out

WACC

solution

we get here WACC that is express as

WACC = ( Weight of debt × After tax cost of debt) + (Weight of equity × Cost of equity) + (Weight of preferred stock × cost of preferred stock)   ..................1

and cost of debt after tax will be

cost of debt after tax = 8% of ( 1 - 30%)

cost of debt after tax = 5.6%

and Weight of debt = $\frac{50000000}{100000000}$ = 0.50

and Weight of equity =  $\frac{25000000}{100000000}$ = 0.25

and Weight of preferred stock = $\frac{25000000}{100000000}$ = 0.25

so WACC = ( 0.50 × 0.056 ) +  ( 0.25 × 0.09 ) +  ( 0.25 × 0.10 )

WACC = 0.0755

WACC = 7.55 %

so correct option is A) 7.55%