PrimaCare has a capital structure that consists of $7 million of debt,$2 million of preferred stock,and $11 million of common equity,based upon current market values.The firm's yield to maturity on its bonds is 7.4%,and investors require an 8% return on the firm's preferred and a 14% return on PrimaCare's common stock.If the tax rate is 35%,what is Parker's WACC?

Question

Quizplus · Accepted Answer

Weight of debt = ($7 million/$20 million) = 0.35
Weight of preferred stock = ($2 million/$20 million) = 0.10
Weight of common equity = ($11 million/$20 million) = 0.55

Cost of debt = 7.4%
Cost of preferred stock = 8%
Cost of common equity = 14%

WACC = (Weight of debt x Cost of debt x (1-tax rate)) + (Weight of preferred stock x Cost of preferred stock) + (Weight of common equity x Cost of common equity)

WACC = (0.35 x 7.4% x (1-0.35)) + (0.10 x 8%) + (0.55 x 14%)

WACC = 10.18%

PrimaCare Has a Capital Structure That Consists of $7 Million