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Garden Tools Inc has bonds, preferred stock, and common stocks outstanding
Garden Tools Inc has bonds, preferred stock, and common stocks outstanding. The number of securities outstanding, the current market price, and the required rate of return for these securities are stated in the table below. The firm’s tax rate is 35%.
Calculate the firm's WACC adjusted for taxes using the market information in the table.
Round the answers to two decimal places in percentage form. (Write the percentage sign in the "units" box)
| The Number of Securities Outstanding | Selling price | The Required Rate of Return | |
| Bonds | 1,973 | $1,143 | 12.00% |
| Preferred Stocks | 5,484 | $54.18 | 15.80% |
| Common Stocks | 1,628 | $143.80 | 16.61% |
Expert Solution
market value of debt=number of bonds*price=1973*1143=2255139
market value of preferred stock=number of shares*preferred stock price=5484*54.18=297123.12
market value of equity=number of shares*price=1628*143.80=234106.40
Total capital=2255139+297123.12+234106.40=2786368.5
==> weight of debt=2255139/2786368.5=80.93%
weight of preferred stock=297123.12/2786368.5=10.66%
weight of equity=234106.40/2786368.5=8.40%
after tax cost of debt=required rate*(1-tax rate)=12%*(1-35%)=7.8%
WACC=(weight of debt*after tax cost of debt)+ (weight of preferred stock*cost of preferred stock)+(weight of equity*cost of equity)=(80.93%*7.8%)+(10.66%*15.8%)+(8.40%*16.61%)=9.39%
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