Queen Industrial Supply has a pretax cost of debt of 4.5 percent, a cost of equi
ID: 2802691 • Letter: Q
Question
Queen Industrial Supply has a pretax cost of debt of 4.5 percent, a cost of equity of 17.20 percent, and a cost of preferred stock of 8.35 percent. The firm has 250,000 shares of common stock outstanding at a market price of $84 a share. There are 34,000 shares of preferred stock outstanding at a market price of $52 a share. The bond issue has a face value of $1,200,000 and a market quote of 124.5. The company's tax rate is 34 percent. What is the firm's weighted average cost of capital? Select one: A. 14.25 percent B. 15.68 percent C. 12.48 percent D. 17.88 percent E. 16.10 percent
Explanation / Answer
WACC=Respective costs*Respective investment weights
=(1,494,000/24,262,000*2.97)+(21,000,000/24,262,000*17.2)+(1,765,000/24,262,000*8.35)
which is equal to
=15.68%(Approx)(B).
Type Total Cost Debt (1,200,000*124.5%)=$1,494,000 4.5*(1-0.34)=2.97% Equity (250,000*84)=$21,000,000 17.2% Preferred stock (34000*52)=$1,765,000 8.35% Total=24,262,000