JLP Industries has 6.5 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 25,000 bonds outstanding, each with face value $1,000 and selling at 90 percent of par value. The cost of equity is 14 percent, the cost of preferred stock is 10 percent, and the cost of debt is 6.25 percent. If JLP'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 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 value (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. Plugging in the values: E = 6.5 million * $20 = $130 million, D = 25,000 * $1,000 * 0.9 = $22.5 million, P = $10 million, V = $130 million + $22.5 million + $10 million = $162.5 million. WACC = ($130/$162.5 * 0.14) + ($22.5/$162.5 * 0.0625 * (1-0.34)) + ($10/$162.5 * 0.10) = 12.39%.

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