TJ Industries has 7 million shares of common stock outstanding with a market price of $20.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 100,000 bonds outstanding, each with face value $1,000 and selling at 95% of par value. The cost of equity is 12%, the cost of preferred is 10%, and the cost of debt is 6.45%. If TJ's tax rate is 34%, what is the WACC?
A) 8.92%
B) 9.76%
C) 12.59%
D) 13.43%

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 = equity value = 7 million * $20 = $140 million, D = debt value = 100,000 * $1,000 * 0.95 = $95 million, P = preferred stock value = $10 million, V = E + D + P = $245 million. Re = 12%, Rd = 6.45%, Rp = 10%, Tc = 34%. Plugging these into the formula gives WACC = (140/245 * 0.12) + (95/245 * 0.0645 * 0.66) + (10/245 * 0.10) = 8.92%.

TJ Industries Has 7 Million Shares of Common Stock Outstanding