Jordan Co.\'s CFO is trying to determine the company\'s WACC. He has determined
ID: 2383419 • Letter: J
Question
Jordan Co.'s CFO is trying to determine the company's WACC. He has determined that the company's before-tax cost of debt is 8.7%. The company currently has $230,000 of debt, and the CFO believes that the book value of the company's debt is a good approximation for the market value of the company's debt.
The firm's cost of preferred stock is 9.9%, and the book value of prferred stock is $16,000
Its cost of equity if 13.2%, and the company currently has $210,000 of common equity on its balance sheet
The CFO has estimated that the firm's market value of preferred stock is $20,000 and the market value of its common equity is $320,000.
Determine Jordan's WACC if it is subject to a tax rate of 40%.
A. 7.24%
B. 9.86%
C. 6.41%
D. 11.34%
Explanation / Answer
To determine the WACC value:
WACC = (E/V*Re)+(P/V*Rp)+(D/V*Rd)(1-Tc)
Where:
Cost of Equity (Re) = 13.2%
Cost of Debt (Rd) = 8.7%
Cost of Preferred stock (Rp) = 9.9%
Market value of Equity (E) = $ 320,000
Market value of Debt (D) = $ 230,000
Market value of Preferred Stock (P) = $ 20,000
V = E+D+P è $ 320,000 + $ 230,000 +$ 20,000 è $ 570,000
WACC = (E/V*Re)+(P/V*Rp)+(D/V*Rd)(1-Tc)
Answer : B (9.86%)
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