Garden Tools Inc. has bonds, preferred stock, and common stocks outstanding. The

Question

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

# of securities outstanding Selling price Required rate of return Bonds 1,829 $1,127 9.84% Preferred Stocks 5,940 $52.52 19.84% Comon Stocks 1,724 $69.95 16.72%

Explanation / Answer

Step: 1

calculating market value of bonds, preferred stocks and common stocks

Market value of bonds : 1829*$1,127= $2061283

Market value of preferred stocks : 5940*$52.52= $311968.8

Market value of common stocks: 1724*$69.95= $120593.8

Step:2

Total market value :

$2061283+$311968.8+$120593.8= $2493845.6

Step:3

Calculating weight of each source of financing

Weight of bond financing: $2061283/$2493845.6= 82.65%

Weight of preferred stock financing : $311968.8/$2493845.6= 12.51%

Weight of common stock financing: $120593.8/$2493845.6= 4.84%

step:4

After tax cost of debt financing:

9.84%(1-0.35)= 6.4%

step:5

Calculating WACC

(0.8265)*6 4% +(0.1251)*19.84% +0.0484*16.72%

= 8.58%

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