Weighted Average Cost of Capital [WACC}

Questions 20 through 26 refer to the following date for Roadrunner Enterprises.

This same information will apply for Questions 20-27:

Use the information below to calculate the Weighted Average Cost of Capital [WACC] for Roadrunner Enterprises.

The company has the following components of its capital structure:

DEBT: 22,750 bonds outstanding with a 6.5% coupon rate, paid annually.

Each bond has $1,000 par value with a 30-year stated maturity,

and were issued five years ago.

The bonds currently sell for 85% of par in the market.

PREFERRED STOCK:

There are 29,400 shares of preferred stock outstanding.

The shares sell for $82.31 in the market.

They pay an annual cash dividend of $8.85 per share.

COMMON STOCK:

There are 355,000 shares of common stock outstanding.

The shares sell for $83.25 in the market and pay an annual cash dividend of $2.35 per share.

The stock has a beta of 1.53.

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The company has a corporate tax rate of 30%.

The expected return of the Market; that is, the S&P500 is 10.12% per year.

T-bills are expected to return 3.58% per year.

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What is Roadrunner's after-tax cost of debt?

Select one:

a. 2.0% to 3.0%

b. More than 9.0%

c. 4.0% to 5.0%

d. 1.0% to 2.0%

e. 0% to 1.0%

f. 6.0% to 7.0%

g. 8.0% to 9.0%

h. 5.0% to 6.0%

i. 3.0% to 4.0%

j. 7.0% to 8.0%