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 a $1,000 face value and selling at 96 percent of par value. The cost of equity is 19 percent, the cost of preferred 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 - T) + (P/V) * Rpwhere:E = market value of equityV = total value of the firmRe = cost of equityD = market value of debtRd = cost of debtT = 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%T = 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= 10.14%

PAW Industries Has 5 Million Shares of Common Stock Outstanding