Question

Assume the market value of Fords' equity, preferred stock, and debt are$6 billion, $2 billion, and $13 billion, respectively. Ford has a beta of 1.7, the market risk premium is 8%, and the risk-free rate of interest is 3%. Ford's preferred stock pays a dividend of $4 each year and trades at a price of $30 per share. Ford's debt trades with a yield to maturity of 8.0%. What is Ford's weighted average cost of capital if its tax rate is 30%?

Answer 1

Particulars Debt amount $13 Weights used 0.6190 Preferred stock $2 0.0952 cost of capital weighted cost 5.60% 0.03467 0.08*0.7 13.33% 0.01270 4/30 16.60% 0.04743 0.03+(1.7*0.08) 9.48% weighted average cost of capital common stock $6 0.2857 $21