Given the following information for Jano Corp. ﬁnd the WACC. Assume the company's tax rate is 35%. Bonds: 10,000 7% coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling
For 102 percent of par; the bonds make semi-annual payments. Common Shares: 400,000 shares
Outstanding, selling for $50 per share; the beta is 1.15. Preferred shares: 25,000 shares of 5%
Preferred stock outstanding, currently selling for $65 per share. 8% market risk premium and 4%
Risk-free rate.

Question

Quizplus · Accepted Answer

The correct answer is A because the WACC is 9.97%. The calculation is as follows:**Cost of debt:**Kd = (Coupon rate * (1 - Tax rate)) / Bond priceKd = (7% * (1 - 35%)) / 102%Kd = 4.55%**Cost of preferred stock:**Kp = Dividend / PriceKp = 5% / 65Kp = 7.69%**Cost of common stock:**Ke = Risk-free rate + Beta * Market risk premiumKe = 4% + 1.15 * 8%Ke = 12.2%**WACC:**WACC = (Weight of debt * Cost of debt) + (Weight of preferred stock * Cost of preferred stock) + (Weight of common stock * Cost of common stock)WACC = (0.25 * 4.55%) + (0.05 * 7.69%) + (0.7 * 12.2%)WACC = 9.97%

Given the Following Information for Jano Corp