Corporate Finance Q76

0. Pamela Peterson computes the weighted average cost of capital (WACC) for the company Atom International. The information used for computation is as follows:

-Common equity has beta 1.2 while the risk free rate and market premium are 5% and 7% respectively. The preferred stock has value of $48 with a dividend worth $6.
-The corporate tax rate is 20%.
-Bonds are issued at par and have a coupon rate of 11%.
-Capital structure is 20% preferred stock, 35% debt and 45% common stock.

Atom International’s WACC is closest to:

Answer
Comment
Array

Option : B
Explanation : WACC = Wd Rd (1 – t) + Wp Rp + We Re Re
= Risk free rate + β (Market risk premium)
Re = 5 + 1.2 (7) = 13.4%
Rd = Debt rate (1 - tax rate) Rd = 11 (1 - 0.2) = 8.8%
Rp = Dividend / Price = 6 / 48 = 12.5%
WACC = 0.134 * 0.45 + 0.088 * 0.35 + 0.125 * 0.20
WACC = 11.6%

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