Question

The expected return on the market is 17.72 percent, the risk free rate is 4.25 perfent, and tax rate is 25%. Fairfax Paint has 800,000 common shares outstanding that are priced at 35 dollars per share and have an expected return of 16.5% and an expected real return of 14.77%. Last year, Fairfax Paint common stock had a return of 18.3%. The company also had 600,000 shares of preferred stock outstanding that are priced at 20 dollars per share and have an expected return of 11.7% and an expected real return of 10.4%. Last year FP preferred stock had a return of 13.42%. Finally, the company has 10,000 bonds outstanding with a coupon rate of 10.27%, yield to maturity of 4.89%, current yoeld of 9.34%, face value of 1000 dollars, and price of 1100 dollars. What is the weighted average cost of capital for Fairfax Paint? Answer as a rate in decimal format so that 12.34% would be entered as .1234.

Answer 1

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C w ENG 06:19 31-07-2020 99+ 29 Х B1023 А. B с D E F G — I FAIRFAX AFTER TAX COST OF DEBT = YTM*(1-t) = 4.89%*(1-0.25) = 3.6675% WACC SOURCE COMMON EQUITY PREFERRED STOCK MARKET VALUE 28000000 800000 X 35 = 600000 X 20 = 10000 X 1100 = 12000000 11000000 1006 1007 1008 1009 1010 1011 1012 1013 1014 1015 1016 1017 1018 1019 1020 1021 1022 1023 1024 1025 1026 1027 1028 1029 WEIGHT COC(%) WEIGHTED COST 54.9020% 16.50% 9.0588% 23.5294% 11.70% 2.7529% 21.5686% 3.6675% 0.7910% WACC = 12.6028% WACC = 0.1260 DEBT 51000000 TABLE APPENDIX CUMIPMT PV FVstate Sheet4 PV FV PRICE YTM choice Actaval CON REFIN DIFF EAR nper WACC YIELD HERC ...