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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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Kolawole845

Answer:

= 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%

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