JLP Industries has 6.5 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 25,000 bonds outstanding, each with face value $1,000 and selling at 90% of par value. The cost of equity is 14%, the cost of preferred is 10%, and the cost of debt is 6.25%. If JLP's tax rate is 34%, what is the WACC?
A) 12.39%
B) 12.98%
C) 13.13%
D) 13.72%

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 = 6.5 million * $20 = $130 million, D = debt value = 25,000 * $1,000 * 0.9 = $22.5 million, P = preferred stock value = $10 million, V = E + D + P = $162.5 million. Re = 14%, Rd = 6.25%, Rp = 10%, Tc = 34%. WACC = ($130M/$162.5M * 14%) + ($22.5M/$162.5M * 6.25% * (1-0.34)) + ($10M/$162.5M * 10%) = 12.39%.

JLP Industries Has 6