Question

Western Electric has 21,000 shares of common stock outstanding at a price per share of $61 and a rate of return of 15.6 percent. The firm has 11,000 shares of $8 preferred stock outstanding at a price of $48 a share. The outstanding debt has a total face value of $275,000 and currently sells for 104 percent of face. The yield to maturity on the debt is 8.81 percent. What is the firm's weighted average cost of capital if the tax rate is 35 percent?

a. 14.37 percent
b. 14.52 percent
c. 14.19 percent
d. 13.92 percent
e. 13.44 percent

Answer 1

Answer: = b = 14.52%

Explanation:

Amount of common equity(E) =21000 × 61 = $1,281,000

Amount of preferred shares (P) = 11000 × 48 = $528,000

Amount of debt (D) = 1.04 × 275000 = $286,000

Total amount = $2,095,000

WACC formula is given below

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

where w = weight of shares or stocks

r = cost of shares

wE = 1,281,000 / 2,095,000 = 0.6115

rE = 15.6%

wP = 528,000 / 2,095,000 = 0.2520

rP = Dividend/Price = (8/48) = 0.1667 or 16.67%

wD = 286,000 / 2,095,000 = 0.1365

rD = 8.81%

Now, put in these values to the formula;

WACC = (0.6115 × 0.156 ) + (0.2520 × 0.1667) + [ 0.1365 × 0.0881 × (1-0.35) ]

= 0.0954 + 0.0420 + 0.00782

= 0.1452 or 14.52%

Hence WACC is therefore 14.52%