Johnson Industries finances its projects with 40 percent debt, 10 percent preferred stock, and 50 percent common stock. • The company can issue bonds at a yield to maturity of 8.4 percent.
• The cost of preferred stock is 9 percent.
• The company's common stock currently sells for $30 a share.
• The company's dividend is currently $2.00 a share (D0 = $2.00)• Assume that the flotation cost on debt and preferred stock is zero, and no new stock will be issued.
• The company's tax rate is 30 percent.
What is the company's weighted average cost of capital (WACC)?
A) 8.33%
B) 9.32%
C) 9.79%
D) 9.99%
E) 13.15%

Question

Quizplus · Accepted Answer

Step 1: Calculate the cost of each component
Cost of debt = yield to maturity = 8.4%
Cost of preferred stock = 9%
Cost of common stock = (D0 / current stock price) + growth rate
    D0 = 2, current stock price = 30
    There is no growth rate given, so we assume it to be 0.
    Cost of common stock = (2 / 30) + 0 = 6.67%

Step 2: Calculate the weighted cost of each component
Debt: 40% * 8.4% = 3.36%
Preferred stock: 10% * 9% = 0.9%
Common stock: 50% * 6.67% = 3.335%
    Weighted cost of capital = 3.36% + 0.9% + 3.335% = 9.79%

Therefore, the company's weighted average cost of capital (WACC) is 9.79%.

Johnson Industries Finances Its Projects with 40 Percent Debt, 10