PAW Industries has 5 million shares of common stock outstanding with a market price of $8.00 per share and par value of $1 per share. The company also has outstanding preferred stock with a market value of $10 million, and 100,000 bonds outstanding, each with face value $1,000 and selling at 96 percent of par value. The cost of common stock is 19 percent, the cost of preferred stock is 15 percent, and the cost of debt is 9 percent. All costs are given at the before-tax level. If PAW's tax rate is 21 percent, what is the WACC?
A) 10.91 percent
B) 10.38 percent
C) 12.51 percent
D) 14.33 percent

Question

Quizplus · Accepted Answer

The correct answer is A because the WACC is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - T) + (P/V) * Rpwhere:E = market value of common stock = $5 million * $8.00 = $40 millionD = market value of debt = 100,000 * $1,000 * 0.96 = $96 millionP = market value of preferred stock = $10 millionV = E + D + P = $40 million + $96 million + $10 million = $146 millionRe = cost of common stock = 19%Rd = cost of debt = 9%T = tax rate = 21%Rp = cost of preferred stock = 15%Plugging in the values, we get:WACC = (40/146) * 0.19 + (96/146) * 0.09 * (1 - 0.21) + (10/146) * 0.15= 0.1091= 10.91%

PAW Industries Has 5 Million Shares of Common Stock Outstanding