A Information on Inkscape Co., is shown below. Assume the company\'s tax rate is
ID: 2763286 • Letter: A
Question
A
Information on Inkscape Co., is shown below. Assume the company's tax rate is 35 percent. The firm has no debt.
Common stock: 208,857 shares outstanding, selling for $95.3 per share; beta is 1.06.
Preferred stock: 26,312 shares of 6.8 percent preferred stock outstanding, currently selling for $88 per share.
Market: 8.24 percent market risk premium and 3.23 percent risk-free rate.
Calculate the WACC. Enter answer in percents.
B
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Explanation / Answer
A:
Total market value (Total value Common stock + Total value Preferred stock)
= (208,857 shares * $95.3) + (26,312 shares * $88)
= $19,904,072 + $2,315,456
= $22,219,528.
Percentage of weight of common stock [($19,904,072 /$22,219,528)*100] = 89.58%
Percentage of weight of preferred stock [($2,315,456 /$22,219,528)*100] = 10.42%
E(R) = Rf + (Rm - Rf)
= 3.23 + 1.06(8.24 – 3.23)
= 3.23 + 8.7344 – 3.4238
= 8.5406%
Therefore, cost of common stock is 8.5406%.
Calculation of WACC:
WACC = [(0.8958)* (0.085406)] + [(0.1042)*(0.068)]
= (0.07651) + (0.007086)
= 0.083596 or 8.36%
Therefore WACC is 8.36%.
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