Question

Information on Inkscape Co., is shown below. Assume the company's tax rate is 33 percent. The firm has no debt.
Common stock: 246,087 shares outstanding, selling for $73.3 per share; beta is 1.
Preferred stock: 22,789 shares of 5.7 percent preferred stock outstanding, currently selling for $87.9 per share.
Market: 8.94 percent market risk premium and 3.74 percent risk-free rate.
Calculate the WACC. Enter answer in percents

Answer 1

As per CAPM

expected return = risk-free rate + beta * (Market risk premium)

Expected return% = 3.74 + 1 * (8.94)

Expected return% = 12.68= cost of equity

Cost of preferred equity = dividend/price =5.7/87.9= 6.484%

Total Capital value = price of Common stock*Shares of Common stock + price of Preferred equity*Shares of Preferred equity

=73.3*246087+87.9*22789

=20041330.2

Weight of Common stock = price of Common stock*Shares of Common stock/Total Capital Value

= 18038177.1/20041330.2

=0.9

Weight of Preferred equity = price of Preferred equity*Shares of Preferred equity/Total Capital Value

= 2003153.1/20041330.2

=0.1

Cost of Capital = Weight of Common stock*Cost of Common stock+Weight of Preferred equity*Cost of Preferred equity

Cost of Capital = 12.68*0.9+6.484*0.1

Cost of Capital = 12.06