Question

Find the WACC, assume that company's tax rate is 40% Common stock: 15 million shares outstanding, selling for 5$ per share; thebeta is 1.05 Preffered Stock:5 million snares cutstanding, sallingfor $4.5 per share, pays $0.9 annually per share. Debt 1 million 8% quarters coupon bonds outstanding, $100 face value, 15 years to maturity, selling at Market: 6.5% market return and 4.5% risk-freerate.

Answer 1

Cost of common equity per CAPM = risk free rate+beta*(market return-risk free rate) =
= 4.5%+1.05*(6.5%-4.5%) =	6.60%
Cost of preferred stock = Dividend/Price = 0.9/4.5 =	20.00%
Cost of debt = 8%*(1-40%) =	4.80%
CALCULATION OF WACC:
Component	Market Value           ($ million)	Weight	Component Cost	WACC
Common equity [15*5]	75.00	37.97%	6.60%	2.51%
Preferred stock [5*4.5]	22.50	11.39%	20.00%	2.28%
Debt [1*100]	100.00	50.63%	4.80%	2.43%
	197.50			7.22%
WACC = 7.22%
Note:
*The cost of common stock seems to be too low compared to the cost of preferred stock.
*The cost of debt is taken as 8% (before tax). Stated as 8% quarters is not clear.