A company has 1 million shares of common stock outstanding, which currently trad

Question

A company has 1 million shares of common stock outstanding, which currently trade at a price of $50 per share. The company believes that its stockholders require a 15% return on their investment. The company also has issued 5-year, fixed-rate notes with a yield to maturity of 7%. The current market value of the 5-year notes is $49 million. Lastly, the company has 200,000 outstanding preferred shares, which pay an $8 annual dividend and currently trade for $80 per share. What is the company's WACC if the corporate tax rate is 35%?

a) 11.30%

b) 12.00%

c) 9.80%

d) 14.00%

e) None of the above

Please show how you get this!

Explanation / Answer

cost of preferred stock = 8/80 = 10%

Equity = 1*50 = million

Debt= 49 million

Preferred stock = 200000*80/1000000= 16 million

Total value of firm = 1*50 + 49+16= 115

WACC = 50/115*15%+49*7%/115*(1-35%) + 16/115*10% = 9.80%

c) 9.80%

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