The following market information was gathered for the Blender Corporat

The following market information was gathered for the Blender Corporation. The firm has 1,000 bonds outstanding, each selling for $1,100.00 with a required rate of return of 8.00%.

Blenders has 5,000 shares of preferred stock outstanding, selling for $40.00 per share and 50,000 shares of common stock outstanding, selling for $18.00 per share. If the preferred stock has a required rate of return of 11.00% and the common stock requires a 14.00% return, and the firm has a corporate tax rate of 30%, calculate the firm’s WACC adjusted for taxes.
A) 6.77%
B) 10.73%
C) 9.53%
D) There is not enough information to answer this question because there is no information provided about the amount of retained earnings held by the firm.

ANSWER

Answer: C
Explanation: C) E = $18 × 50,000 shares = $900,000, PS = $40 × 5,000 shares = $200,000, D = $1,100 × 1,000 bonds = $1,100,000.
E/V = $900,000/$2,200,000 = 0.40909, P/V = $200,000/$2,200,000 = 0.0909, D/V = $1,100,000/$2,200,000 = 0.5.
WACC = × Rd × (1 – Tc) + × Rps + × Re = 0.5 × 8% × (1 – 0.30) + 0.0909 × 11% + 0.40909 × 14% = 9.53%.