Question

Peter's Audio has a yield to maturity on its debt of 7.8 percent, a cost of equity of 12.4 percent, and a cost of preferred stock of 8 percent. The firm has 105,000 shares of common stock outstanding at a market price of $22 a share. There are 25,000 shares of preferred stock outstanding at a market price of $45 a share. The bond issue has a total face value of $1.5 million and sells at 98 percent of face value. If the tax rate is 34 percent, what is the weighted average cost of capital?

Answer 1

DETERMINATION OF WEIGHTED AVERAGE COST OF CAPITAL-

Particulars	Cost	Market Value	Weight	WACC
Equity	12.4 %	$ 22 X 105000=23,10,000	2310000 / 4905000= 0.47	=12.4 X 0.47 = 5.828
Debt	7.8 X 0.66 = 5.148 %	$ 1.5 X 10,00,000 X 0.98 = 14,70,000	1470000 / 4905000 = 0.30	= 5.148 X 0.3 = 1.544
Preferred Stock	8 %	25000 X $45 = $ 11,25,000	1125000 / 4905000 = 0.23	8 X 0.23 = 1.84
		$ 49,05,000	1.00	9.212 %

THEREFORE WACC = 9.212 %