CTO Transport has an aftertax cost of debt of 6.8 percent,a cost of equity of 14.2 percent and a cost of preferred stock of 8.5 percent.The firm has 50,000 shares of common stock outstanding at a market price of $43 a share.There are 20,000 shares of preferred stock outstanding at a market price of $46 a share.The bond issue has a total face value of $500,000 and sells at 97 percent of face value.The tax rate is 35 percent.What is WACC?

Question

Quizplus · Accepted Answer

MV_Debt = $500,000 × .97 = $485,000MV_Preferred = 20,000 × $46 = $920,000MV_Equity = 50,000 × $43 = $2,150,000MV_{D + E} = $485,000 + 920,000 + 2,150,000 = $3,555,000WACC = ($2,150,000/$3,555,000)× .142 + ($920,000/$3,555,000)× .085 + ($485,000/$3,555,000)× .068 = .1172,or 11.72%

CTO Transport Has an Aftertax Cost of Debt of 6