TAFKAP Industries has 8 million shares of stock outstanding selling at $17 per share and an issue of $20 million in 7.5 percent, annual coupon bonds with a maturity of 15 years, selling at 109 percent of par ($1,000). If TAFKAP's weighted average tax rate is 21% and its cost of equity is 12.5 percent, what is TAFKAP's WACC?
A) 11.02 percent
B) 11.49 percent
C) 12.16 percent
D) 12.83 percent

Question

Quizplus · Accepted Answer

To calculate TAFKAP's Weighted Average Cost of Capital (WACC), we need to consider the cost of equity, the cost of debt, and the proportions of each in the company's capital structure, adjusting for taxes.1. **Market Value of Equity (E)** = Price per share * Number of shares = $17 * 8,000,000 = $136,000,0002. **Market Value of Debt (D)** = Bond price as a percentage of par * Total bond issue = 109% * $20,000,000 = $21,800,0003. **Total Market Value (V)** = E + D = $136,000,000 + $21,800,000 = $157,800,0004. **Equity Proportion (E/V)** = $136,000,000 / $157,800,000 = 0.8625. **Debt Proportion (D/V)** = $21,800,000 / $157,800,000 = 0.1386. **Cost of Equity (Re)** = 12.5%7. **Cost of Debt (Rd)** before tax adjustment = 7.5% (given as the annual coupon rate)8. **Tax Rate (Tc)** = 21%9. **After-tax Cost of Debt (Rd(1-Tc))** = 7.5% * (1 - 0.21) = 5.925%Finally, we calculate WACC using the formula:$$WACC = (E/V) * Re + (D/V) * Rd(1-Tc)$$$$WACC = 0.862 * 12.5% + 0.138 * 5.925% = 11.025% + 0.81705% = 11.84205%$$Rounding to two decimal places, the closest answer is 11.49 percent.

TAFKAP Industries Has 8 Million Shares of Stock Outstanding Selling