PAW Industries has 5 million shares of common stock outstanding with a market price of $8.00 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 96 percent of par value. The cost of equity is 19 percent, the cost of preferred stock is 15 percent, and the cost of debt is 9 percent. If PAW's tax rate is 34 percent, what is the WACC?
A)10.14 percent
B)10.38 percent
C)12.51 percent
D)14.33 percent

Question

Quizplus · Accepted Answer

The correct answer is A because the WACC is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc) + (P/V) * Rpwhere:E = market value of equityV = total value of the firmRe = cost of equityD = market value of debtRd = cost of debtTc = tax rateP = market value of preferred stockRp = cost of preferred stockIn this case, we have:E = 5 million shares * $8.00 per share = $40 millionV = $40 million + $10 million + (100,000 * $1,000 * 0.96) = $65.6 millionRe = 19%D = 100,000 * $1,000 * 0.96 = $9.6 millionRd = 9%Tc = 34%P = $10 millionRp = 15%Therefore, the WACC is:WACC = (40/65.6) * 0.19 + (9.6/65.6) * 0.09 * (1 - 0.34) + (10/65.6) * 0.15= 0.1014 or 10.14%

PAW Industries Has 5 Million Shares of Common Stock Outstanding