JLP Industries has 6.5 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 25,000 bonds outstanding, each with face value $1,000 and selling at 90 percent of par value. The cost of equity is 14 percent, the cost of preferred stock is 10 percent, and the yield of the debt is 6.25%. If JLP's tax rate is 34 percent, what is the WACC?
A) 12.39 percent
B) 12.98 percent
C) 13.13 percent
D) 13.72 percent

Question

Quizplus · Accepted Answer

The correct answer is A.The WACC is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc) + (P/V) * Rpwhere:E = market value of equityV = total value of the firmRe = cost of equityD = market value of debtRd = yield to maturity on debtTc = corporate tax rateP = market value of preferred stockRp = cost of preferred stockIn this case, we have:E = 6.5 million shares * $20.00 per share = $130 millionV = $130 million + $10 million + (25,000 bonds * $1,000 * 0.90) = $162.5 millionRe = 14%D = 25,000 bonds * $1,000 * 0.90 = $22.5 millionRd = 6.25%Tc = 34%P = $10 millionRp = 10%Therefore, the WACC is:WACC = (130/162.5) * 0.14 + (22.5/162.5) * 0.0625 * (1 - 0.34) + (10/162.5) * 0.10= 0.1239= 12.39%

JLP Industries Has 6