TJ Industries has 7 million shares of common stock outstanding with a market price of $20.00 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 95 percent of par value. The cost of common stock is 12 percent, the cost of preferred stock is 10 percent, and the cost of debt is 6.45 percent. All costs are given at the before-tax level. If TJ's tax rate is 21 percent, what is the WACC?
A) 9.24 percent
B) 9.77 percent
C) 12.59 percent
D) 8.44 percent

Question

Quizplus · Accepted Answer

The WACC is calculated using the formula: WACC = (E/V * Re) + (D/V * Rd * (1-Tc)) + (P/V * Rp). Here, E = equity value = 7 million shares * $20 = $140 million, D = debt value = 100,000 bonds * $1,000 * 0.95 = $95 million, P = preferred stock value = $10 million, V = E + D + P = $245 million. Re = 12%, Rd = 6.45%, Rp = 10%, Tc = 21%. WACC = ($140M/$245M * 12%) + ($95M/$245M * 6.45% * (1-0.21)) + ($10M/$245M * 10%) = 9.24%.

TJ Industries Has 7 Million Shares of Common Stock Outstanding