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 is 15 percent,and the cost of debt is 9 percent.If PAW'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). Here, E = equity value = 5 million shares * $8 = $40 million, D = debt value = 100,000 bonds * $1,000 * 0.96 = $96 million, P = preferred stock value = $10 million, V = E + D + P = $40 million + $96 million + $10 million = $146 million. Re = 19%, Rd = 9%, Rp = 15%, Tc = 34%. Plugging these into the formula gives WACC = ($40M/$146M * 19%) + ($96M/$146M * 9% * (1-0.34)) + ($10M/$146M * 15%) = 10.14%.

PAW Industries Has 5 Million Shares of Common Stock Outstanding