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 stock is 10 percent, and the cost of debt is 6.45 percent. If TJ's tax rate is 34 percent, what is the WACC?
A)8.92 percent
B)9.76 percent
C)12.59 percent
D)13.43 percent

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 the market value of equity, D is the market value of debt, P is the market value of preferred stock, V is the total market value of the firm's financing (E + D + P), Re is the cost of equity, Rd is the cost of debt, Rp is the cost of preferred stock, and Tc is the 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