Garden Tools Inc. has bonds, preferred stock, and common stocks outstanding. The
ID: 2772619 • Letter: G
Question
Garden Tools Inc. has bonds, preferred stock, and common stocks outstanding. The number of securities, 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 anser to two decimal places in percentage form.
The Number of Securities Outstanding Selling Price The Required Rate of Retun Bonds 1,913 $1,137 8.03% Preferred Stocks 5,979 $58.11 18.42% Common Stocks 1,941 $117.10 14.41%Explanation / Answer
Market value of Bonds = 1913 x $1137 = $2,175,081
Market value of Preferred stock = 5979 x $58.11 = $347,440
Market value of common stocks = 1941 x $117.10 = $227,291
Total market value = $(2,175,081 + 347,440 + 227,291) = $2,749,812
Proportion of Bonds = $2,175,081 / $2,749,812 = 79.1%
Proportion of Preferred Stock = $347,440 / $2,749,812 = 12.64%
Proportion of Common Stock = $227,291 / $2,749,812 = 8.26%
So,
WACC = (79.1% x 8.03% x 0.65) + (12.64% x 18.42%) + (8.26% x 14.41%)
= 4.13% + 2.33% + 1.19%
= 7.65%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.