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 percent of par value. The cost of equity is 12 percent, the cost of preferred is 10 percent, and the cost of debt is 6.45 percent. If TJ's tax rate is 34 percent, what is the WACC?

Question

Quizplus · Accepted Answer

The WACC is calculated using the formula: WACC = (E/V * Re) + (D/V * Rd * (1-Tc)) + (P/V * Rp), where E is equity, D is debt, P is preferred stock, V is total value, Re is cost of equity, Rd is cost of debt, Rp is cost of preferred, and Tc is tax rate. Calculating each component and substituting into the formula gives a WACC of 8.92 percent.

TJ Industries Has 7 Million Shares of Common Stock Outstanding