Question

Calculate the WACC for the following data: A company raised $100,000,000. $50,000,000 came from the sale of bonds which have a current yield of 8%. $25,000,000 came from the sale of common stock which has a cost equal to 14%. The final $25,000,000 came from the sale of preferred stock which has a cost equal to 10%. The company's tax rate is 50%.Group of answer choices

Answer 1

WACC = 8%

Step-by-step explanation:

WB = Weight of bond = Amount raised from bond / Total amount raised = $50,000,000 / $100,000,000 = 0.50

WC = Weight of common stock = Amount raised from common stock / Total amount raised = ($25,000,000 / $100,000,000) = 0.25

WP = Weight of preferred stock = Amount raised from preferred stock / Total amount raised = ($25,000,000 / $100,000,000) = 0.25

CB = Cost of bond = Current yield of the bond * (100% - Tax rate) = 8% * (100% - 50%) = 4%

CC = Cost of common stock = 14%

CP = Cost of preferred stock = 10%

Therefore, weighted average cost of capital (WACC) can be calculated as follows:

WACC = (WB * CB) + (WC * CC) + (WP * CP) = (0.50 * 4%) + (0.25 * 14%) + (0.25 * 10%) = 0.08, or 8%