Question

	The # of securities outstanding	Selling price	The required rate of return
Bonds	1,838	$1,098	11.50%
Preferred stocks	4,227	$81.43	18.64%
Common stocks	1,028	$55.64	15.60%

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. Round two decimal places

Answer 1

We are given the required rate of return for each security type which is essentially the respective cost of capital. We will calculate the market values and weights of ech type of security and then calculate the WACC.

Security	# Outstanding	Market Price	Market Value	Weightage in Market Value	Required Rate	Weighted Required Rate
Bond	1898	1098	2084004	83.85%	7.48%	6.27%
Pref Stock	4227	81.43	344204.61	13.85%	18.64%	2.58%
Equity	1028	55.64	57197.92	2.30%	15.60%	0.36%
Total				100%		9.21%

We have adjusted the debt require rate by tax = 11.50% * (1-35%) = 7.48%

WACC = 9.21%