TAFKAP Industries has 5 million shares of stock outstanding selling at $14 per s

Question

TAFKAP Industries has 5 million shares of stock outstanding selling at $14 per share, and an issue of $30 million in 7.5 percent annual coupon bonds with a maturity of 15 years, selling at 103 percent of par. Assume TAFKAP’s weighted average tax rate is 34 percent and its cost of equity is 13.0 percent.

What is TAFKAP’s WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

TAFKAP Industries has 5 million shares of stock outstanding selling at $14 per share, and an issue of $30 million in 7.5 percent annual coupon bonds with a maturity of 15 years, selling at 103 percent of par. Assume TAFKAP’s weighted average tax rate is 34 percent and its cost of equity is 13.0 percent.

Explanation / Answer

equity= 5,000,000*$14= $70,000,000

bonds= $30,000,000

WACC=

cost of equity= 70,000,000/100,000*13= 9.1

cost of debt= 30,000,000/100,000,000*4.95= 1.485

WACC= 9.1+1.485= 10.585%

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