Question

Pfd Cumpany has deb wi h a yield o maturity u67% a co of equity of 13% and ฮ cus of preference stock of 9% The market values af its debt preference stock and equity are S13 milion $3 milion and $15 million respe vely and its ax rate匕35% What is this firm's WAC a. The wACC (adjusted for tax) lS 9.07%. b. The WACC (adjusted for tax) is 979% The WACC (adjusted for tax) is 10.1 0%. O d. The WACC (adjusted for tax) 158.42%.

Answer 1

The correct answer is:

a). 9.07%

using formula: WACC = (E/V * Ke) + (D/V) * Kd * (1 – Tax rate)

where,

• E = Market Value of Equity ($15,000,000)
• V = Total market value of equity & debt ($28,000,000)
• Ke = Cost of Equity (0.13)
• D = Market Value of Debt ($13,000,000)
• Kd = Cost of Debt (0.07)
• Tax Rate = Corporate Tax Rate (0.35)

= ($15,000,000/$28,000,000 * 0.13) + ($13,000,000/$28,000,000) * 0.07 * (1 – 0.35)

= 0.090768 = 9.090768%