Question

Consider the case of Peaceful Book Binding Company The CFO of Peaceful Book Binding Company is trying to determine the company's WACC. He has determined that the company's before-tax cost of debt is 11.10%. The company currently has $100,000 of debt, and the CFO believes that the book value of the company's debt is a good approximation for the market value of the company's debt. • The firm's cost of preferred stock is 12.20%, and the book value of preferred stock is $10,500. • Its cost of equity is 14.70%, and the company currently has $85,000 of common equity on its balance sheet. • The CFO has estimated that the firm's market value of preferred stock is $30,000, and the market value of its common equity is $140,000. If PBBC is subject to a tax rate of 40%, Peaceful Book Binding Company's WACC is

Answer 1

D4 - för =+C4/$C$11 ДА 1 Issuing new common stocks will increase raise the WACC E F G | 0.75% =(16.8%-14.7%)*36% Market Cost % value Market value weights 0.5185 WACC (Cost %xWeights) 7.622% 4 Common stock 14.70% $ 140,000 6 Debt (After tax cost) $ 100,000 0.3704 2.467% 6.66% =11.1%*(1-40%) 12.20% $ 30,000 0.1111 1.356% 9 Preferred stock 10 Total $ 270,000 1.0000 Peaceful WACC 11.44% Market value $ 36 Cost % 15.81% =1.36/(22.35*(1-8%))+9.2% Market value weights 0.3600 WACC (Cost %xWeights) 5.69% 16 Common stock 17 18 $ 58 0.5800 3.03% 5.22% =RATE(5,100,-1050.76,1000)*(1-40%) 19 Debt (After tax cost) 20 21 22 Preferred stock $ 0.0600 0.59% 9.76% =9/92.25 Total $ 100 1.0000 Moose WACC 9.31%

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