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 shares of common stock outstanding at a market price of $22 a share. There are 25 shares of preferred stock outstanding at a market price of $45 a share. The bond issue has a total face value of $1,500 and sells at 98 percent of face value. If the tax rate is 21 percent, what is the weighted average cost of capital assuming all interest is tax deductible

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Business

Dominic Thomas

28 February, 13:09

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 shares of common stock outstanding at a market price of $22 a share. There are 25 shares of preferred stock outstanding at a market price of $45 a share. The bond issue has a total face value of $1,500 and sells at 98 percent of face value. If the tax rate is 21 percent, what is the weighted average cost of capital assuming all interest is tax deductible

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Luis Gutierrez · Answer 1

= 9.5%

Explanation:

The weighted average cost of capital can be computed as follows:

After tax cost of debt:

= Before-tax cost of debt (1-T)

= 7.8% * (1-0.21)

= 6%

Market value

Equity = 105 * 22 = 2,310.00

Preferred stock = 25 * 45 = 1,125.00

Bonds = 98% * 1500=1,470.00

Type cost Market value Cost * equity

Equity 12.4 2,310.00 286.44

Preferred stock 8% 1,125.00 90.00

Bond 6% 1,470.00 1 90.58

4,905.00 467.02

WACC = (467.02/4,905.00) * 100

= 9.5%