Rogue Rotors has debt with a market value of $350,000,preferred stock with a market value of $100,000,and common stock with a market value of $650,000.If debt has a cost of 7%,preferred stock a cost of 9%,common stock a cost of 13%,and the firm has a tax rate of 30%,what is the WACC?
A)8.64%
B)9.12%
C)10.06%
D)10.88%

Question

Quizplus · Accepted Answer

1) Calculate the total market value of the firm:

Total market value = Debt market value + Preferred stock market value + Common stock market value

Total market value = $350,000 + $100,000 + $650,000 = $1,100,000

2) Calculate the weight of each component in the capital structure:

Weight of debt = Debt market value / Total market value

Weight of debt = $350,000 / $1,100,000 = 0.318

Weight of preferred stock = Preferred stock market value / Total market value

Weight of preferred stock = $100,000 / $1,100,000 = 0.091

Weight of common stock = Common stock market value / Total market value

Weight of common stock = $650,000 / $1,100,000 = 0.591

3) Calculate the after-tax cost of debt:

After-tax cost of debt = Cost of debt × (1 - Tax rate)

After-tax cost of debt = 7% × (1 - 0.30) = 4.9%

4) Calculate the WACC:

WACC = Weight of debt × After-tax cost of debt + Weight of preferred stock × Cost of preferred stock + Weight of common stock × Cost of common stock

WACC = 0.318 × 4.9% + 0.091 × 9% + 0.591 × 13% = 10.06%

Therefore, the best choice is C, 10.06%.

Rogue Rotors Has Debt with a Market Value of $350,000,preferred