Question

Peter's Audio has a yield to maturity on its debt of 7.8 percent, a cost of equity of 12.4 percent, and a cost of preferred stock of 8 percent. The firm has 105 shares of common stock outstanding at a market price of $22 a share. There are 25 shares of preferred stock outstanding at a market price of $45 a share. The bond issue has a total face value of $1,500 and sells at 98 percent of face value. If the tax rate is 21 percent, what is the weighted average cost of capital assuming all interest is tax deductible

Answer 1

= 9.5%

Step-by-step explanation:

The weighted average cost of capital can be computed as follows:

After tax cost of debt :

= Before-tax cost of debt (1-T)

= 7.8% × (1-0.21)

= 6%

Market value

Equity = 105× 22= 2,310.00

Preferred stock = 25× 45= 1,125.00

Bonds= 98% × 1500=1,470.00

Type cost Market value Cost × equity

Equity 12.4 2,310.00 286.44

Preferred stock 8% 1,125.00 90.00

Bond 6% 1,470.00 1 90.58

4,905.00 467.02

WACC = (467.02/4,905.00 ) × 100

= 9.5%