The following market information was gathered for the Rogue Corporation.The firm has 5,000 bonds outstanding,each selling for $1,050.00 with a required rate of return of 7.00%.Rogue has 3,000 shares of preferred stock outstanding,selling for $60.00 per share and 80,000 shares of common stock outstanding,selling for $24.00 per share.If the preferred stock has a required rate of return of 9.00% and the common stock requires a 11.00% return,and the firm has a corporate tax rate of 20%,calculate the firm's WACC adjusted for taxes.
A)6.77%
B)9.23%
C)9.53%
D)There is not enough information to answer this question because there is no information provided about the amount of retained earnings held by the firm.

Question

Quizplus · Accepted Answer

The WACC is calculated using the formula: WACC = (E/V * Re) + (D/V * Rd * (1-Tc)) + (P/V * Rp). Here, E is the market value of equity, D is the market value of debt, P is the market value of preferred stock, Re is the cost of equity, Rd is the cost of debt, Rp is the cost of preferred stock, and Tc is the corporate tax rate. Calculating each component:  - Market value of debt (D) = 5,000 bonds * $1,050 = $5,250,000  - Market value of preferred stock (P) = 3,000 shares * $60 = $180,000  - Market value of equity (E) = 80,000 shares * $24 = $1,920,000  - Total market value (V) = D + P + E = $5,250,000 + $180,000 + $1,920,000 = $7,350,000  - WACC = (1,920,000/7,350,000 * 0.11) + (5,250,000/7,350,000 * 0.07 * (1-0.20)) + (180,000/7,350,000 * 0.09) = 9.23%

The Following Market Information Was Gathered for the Rogue Corporation