Question

PNB Industries has 20 million shares of common stock outstanding with a market price of $18.00 per share. The company also has outstanding preferred stock with a market value of $50 million, and 500,000 bonds outstanding, each with face value $1,000 and selling at 97% of par value. The cost of equity is 15%, the cost of preferred is 12%, and the cost of debt is 8.50%. If PNB's tax rate is 40%, what is the WACC?A. 7.05%B. 9.47%C. 11.31%D. 11.83%

Answer 1

B. 9.47%

Step-by-step explanation:

Common Stock = 20,000,000*$18 = $360,000,000, so 360,000,000/895,000,000 = 0.4022

Preferred Stock= $50,000,000, so 50,000,000/895,000,000 = 0.0559

Bonds = 500,000*0.97*1000 = $485,000,000, so 485,000,000/895,000,000 = 0.05419

WACC = 0.4022*15% + 0.0559*12% + 0.5419*8.5%* (1 - 0.4)

WACC = 0.06033 + 0.006708 + 0.0276369

WACC = 0.0946749

WACC = 9.47%