Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8%. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. There are 40,000 shares of preferred stock outstanding at a market price of $34 a share. The bond issue has a total face value of $500,000 and sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of capital for Peter's Audio Shop? Group of answer choices 9.45%

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Business

Teresa

11 February, 19:10

Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8%. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. There are 40,000 shares of preferred stock outstanding at a market price of $34 a share. The bond issue has a total face value of $500,000 and sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of capital for Peter's Audio Shop? Group of answer choices 9.45%

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Diana Webb · Answer 1

First, find the market values of each;

Equity = 104,000*20 = $2,080,000

Preferred stock = 40,000*34 = $1,360,000

Debt = 1.02*500,000 = $510,000

TOTAL = 2,080,000 + 1,360,000 + 510,000 = 3,950,000

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

wE = weight of equity = 2,080,000/3,950,000 = 0.527

rE = cost of equity = 11% or 0.11

wP = weight of Preferred stock = 1,360,000/3,950,000 = 0.344

rP = cost of preferred stock = 8% or 0.08

wD = weight of debt = 510,000/3,950,000 = 0.129

rD = cost of debt = 7% or 0.07

Therefore,

WACC = (0.527 * 0.11) + (0.344 * 0.08) + (0.129 * (0.07 (1-0.34))

WACC = 0.05797 + 0.02752 + 0.0059598

WACC = 0.0914498 OR 9.14%