The following information will be used for the next three quiz questions: Jones

Question

The following information will be used for the next three quiz questions:

Jones Industries has a current capital structure of 50% debt, 30% preferred stock, and 20% common equity. The company is trying to determine its marginal cost of capital. Assume that initially, common equity will be in the form of retained earnings and then new common stock. Assume the following as costs of the various sources of financing:

Debt = 9.6%, Preferred stock = 9%, Retained Earnings = 10%, New common stock = 11.2%

Part 1: What is the initial WACC?

Select one:

a. 9.50%

b. 12.0%

c. 9.23%

d. 7.98%

e. 6.92%

Explanation / Answer

WACC = % of common stock* cost of retained earning + % of preferred stock* cost of PS + % of debt*cost of debt   

            = 0.3*0.09+0.2*0.1+0.5*0.096

             = 0.095 or 9.5%

Correct option is A.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.