The following market information was gathered for the Teacup Piglets Corporation

Question

The following market information was gathered for the Teacup Piglets Corporation. Teacup Piglets Corp. has 5,000 shares of preferred stock outstanding, selling for $40 per share, and 50,000 shares of common stock outstanding, selling for $18 per share. The firm has 1,000 bonds outstanding, each selling for $1,100 with a required rate of return of 8%. If the preferred stock has a required rate of return of 10% and the common stock requires a 15% return, and the firm has a corporate tax rate of 30%, calculate the firm's WACC adjusted for taxes.

Explanation / Answer

COMPONENT COST OF CAPITAL: Cost of debt (after tax) = 0.08*(1-0.30) = 5.60% Cost of preferred stock (given) 10.00% Cost of common stock 15.00% CALCULATION OF WACC: SOURCE OF CAPITAL MARKET VALUE WEIGHT COMPONENT COST WACC Debt (1000*$1100) 1100000 0.50000 5.60% 2.80% Preferred stock (5000*$40) 200000 0.09091 10.00% 0.91% Common stock (50000*$18) 900000 0.40909 15.00% 6.14% Total 2200000 1.00000 9.85% Answer: 9.85%

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