Rogue Drafting has debt with a market value of $450,000,preferred stock with a market value of $150,000,and common stock with a market value of $350,000.If debt has a cost of 8%,preferred stock a cost of 10%,common stock a cost of 12%,and the firm has a tax rate of 30%,what is the WACC?
A)8.65%
B)9.12%
C)9.33%
D)9.46%

Question

Quizplus · Accepted Answer

The WACC is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc) + (Ps/V) * Rpswhere:E = market value of equityV = market value of the firmRe = cost of equityD = market value of debtRd = cost of debtTc = tax ratePs = market value of preferred stockRps = cost of preferred stockIn this case, we have:E = $350,000V = $450,000 + $150,000 + $350,000 = $950,000Re = 12%D = $450,000Rd = 8%Tc = 30%Ps = $150,000Rps = 10%Plugging these values into the formula, we get:WACC = (350,000/950,000) * 12% + (450,000/950,000) * 8% * (1 - 30%) + (150,000/950,000) * 10%= 4.42% + 2.88% + 1.58%= 8.88%Therefore, the WACC is 8.88%, which is closest to choice A, 8.65%.

Rogue Drafting Has Debt with a Market Value of $450,000,preferred