PAW Industries has 5 million shares of common stock outstanding with a market price of $8.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 100,000 bonds outstanding, each with face value $1,000 and selling at 96% of par value. The cost of equity is 19%, the cost of preferred is 15%, and the cost of debt is 9%. If PAW's tax rate is 34%, what is the WACC?

a. 10.14%

b. 10.38%

c. 12.51%

d. 14.33%

Question

Business

Justice Gates

9 March, 03:04

PAW Industries has 5 million shares of common stock outstanding with a market price of $8.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 100,000 bonds outstanding, each with face value $1,000 and selling at 96% of par value. The cost of equity is 19%, the cost of preferred is 15%, and the cost of debt is 9%. If PAW's tax rate is 34%, what is the WACC?

a. 10.14%

b. 10.38%

c. 12.51%

d. 14.33%

+4

Answers (1)

Know the Answer?

Oswaldo Pratt · Answer 1

a. 10.14%

Explanation:

WACC = wE*rE + wP*rP + wD*rD (1-tax) whereby;

w = weight of ...

r = cost of ...

Find the market values;

Common equity (E) = 5,000,000 * 8 = 40,000,000

Preferred stock (P) = 10,000,000

Debt (D) = 100,000 * 1000 * 0.96 = 96,000,000

Total value = 146,000,000

Therefore;

wE = 0.2740

wP = 0.0685

wD = 0.6575

Cost of capital;

rE = 19% or 0.19

rP = 15% or 0.15

rD = 9% or 0.09

WACC = (0.2740*0.19) + (0.0685 * 0.15) + [0.6575*0.09 (1-0.34) ]

WACC = 0.0521 + 0.0103 + 0.0391

WACC = 0.1015 or about 10.14%