TAFKAP Industries has 4 million shares of stock outstanding selling at $17 per s

Question

TAFKAP Industries has 4 million shares of stock outstanding selling at $17 per share, and an issue of $24 million in 7.5 percent annual coupon bonds with a maturity of 20 years, selling at 106 percent of par. Assume TAFKAP’s weighted average tax rate is 34 percent and its cost of equity is 12.5 percent.

What is TAFKAP’s WACC?

TAFKAP Industries has 4 million shares of stock outstanding selling at $17 per share, and an issue of $24 million in 7.5 percent annual coupon bonds with a maturity of 20 years, selling at 106 percent of par. Assume TAFKAP’s weighted average tax rate is 34 percent and its cost of equity is 12.5 percent.

Explanation / Answer

Computation of WACC:

TAFKAP's WACC is 0.104 or 10.4%

Source of capital Market values Market value weights Cost of capital Weighted cost of capital Equity 68,000,000 0.728 0.125 0.091 Bonds 25,440,000 0.272 0.0495 0.013 93,440,000 1.000 0.104

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