The firm has 1,000 bonds outstanding, each selling for $1,100.00 with a required rate of return of 8.00%. Blenders has 5,000 shares of preferred stock outstanding,

The following market information was gathered for the Blender Corporation.
The firm has 1,000 bonds outstanding, each selling for $1,100.00 with a
required rate of return of 8.00%. Blenders has 5,000 shares of preferred
stock outstanding, selling for $40.00 per share and 50,000 shares of
common stock outstanding, selling for $18.00 per share. If the preferred
stock has a required rate of return of 11.00% and the common stock
requires a 14.00% return, and the firm has a corporate tax rate of 30%,
then calculate the firm's WACC adjusted for taxes.

A) 9.53%
B) 10.73%
C) 6.77%
D) There is not enough information to answer this question because there is
no information provided about the amount of retained earnings held by the
firm.


Solution:

Value of common stock = 50,000 x $18 = $900,000

Value of bonds = 1,000 x $1,100 = $1,100,000

Value of preferred stock = 5,000 x $40 = $200,000

Total value = $900,000 + $1,100,000 + $200,000 = $2,200,000

Weight of common stock = $900,000/$2,200,000 = 0.4091

Weight of preferred stock = $200,000/$2,200,000 = 0.091

Weight of bonds = $1,100,000/$2,200,000 = 0.5

WACC = wd*kd*(1 – t) + we*ke + wp*kp

= 0.5*8%*(1 – 0.3) + 0.4091*14% + .091*11%

= 9.53%