Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital. Its...

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Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital. Its current capital structur

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Answer 1

Answer #1

Answer :-

Option D - 8.73%

Explanation :-

Weighted Avarage Cost of capital = (after tax cost cost of debt × weight) + (Cost of Equity capital × Weight) + (Cost of preferred capital × Weight)

.

Before tax cost of debt = 10%

Tax rate = 35 %

After tax cost of debt = 10% × (1-0.35)

= 6.5%

Weight of debt = 0.65

Cost of Equity capital = 15%

Weight of Equity capital = 0.10

Cost of Preferred capital =12%

Weight of Preferred capital = 0.25

Weighted Avarage Cost of capital = (after tax cost cost of debt × weight) + (Cost of Equity capital × Weight) + (Cost of preferred capital × Weight)

= (6.5% × 0.65) + (15% × 0.10) + (12% × 0.25)

= 4.225% + 1.5% + 3%

Weighted Avarage Cost of capital = 8.725% or 8.73%

.

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