Question

The market value of Fords' equity, preferred stock and debt are $8 billion, $4 billion and $15 billion respectively. Ford has a beta of 1.3, the market risk premium is 6% and the risk-free rate of interest is 5%. Ford's preferred stock pays a dividend of $3 each year and trades at a price of $25 per share. Ford's debt trades with a yield to maturity of 9.5%. What is Ford's weighted average cost of capital if its tax rate is 35%? O A. 8.1% O B. 9% O C. 8.55% OD 7.65%

Answer 1

Weight of Equity =$8 billion / (8 + 4 + 15) = 0.2963

Weight of Preferred stock = $4 billion / (8 + 4 + 15) = 0.14815

Weight of Debt = $15 billion / (8 + 4 + 15) = 0.5556

Cost of Equity = 5% + [1.3 * 6%] = 12.80%

Cost of preferred stock = $3 / $25 = 0.12 or 12%

Cost of Debt = 9.5%

Weighted Average cost of capital = [0.2963 * 12.8%] + [0.14815 * 12%] + [0.5556 * 9.5% * (1 - 0.35)]

Weighted Average cost of capital = 3.79264% + 1.7778% + 3.43083%

Weighted Average cost of capital = 9.0013%  Or

Weighted Average cost of capital = 9%