Western Electric has 25,500 shares of common stock outstanding at a price per share of $66 and a rate of return of 13.65 percent. The firm has 6,650 shares of 6.50 percent preferred stock outstanding at a price of $88.50 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $365,000 and currently sells for 104.5 percent of face. The yield to maturity on the debt is 7.69 percent. What is the firm's weighted average cost of capital if the tax rate is 21 percent?

Multiple Choice

10.15%
10.38%
11.39%
11.16%

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abiolataiwo2015 abiolataiwo2015 · Answer 1 · 2022-11-17T17:24:22+01:00

The firm's weighted average cost of capital if the tax rate is 21 percent is: D. 11.16%

Common stock:

Common stock = 25,500 × $66

Common stock = $1,683,000

Preferred stock:

Preferred stock = 6,650 × $88.50

Preferred stock = $588,525

Debt:

Debt = 104.5% × $365,000

Debt = $381,425

Total market value = $1,683,000 + $588,525 + $381,425

Total market value = $2,652,950

WACC = ($1,683,000 /$2,652,950)(.1365) + ($588,525 /$2,652,950 )(6.5/88.50) + ( $381,425/$2,652,950 )(.0769)(1 -.21)

WACC = ($1,683,000 /$2,652,950)(.1365) + ($588,525 /$2,652,950 )(0.07344633) + ( $381,425/$2,652,950 )(.0769)(.79)

WACC =0.0865939803+0.0162931836 +0.0087344

WACC= 0.1116 ×100

WACC=11.16%

Therefore the correct option is D.

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