Question

Phillips Equipment has 75,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 7.5 percent. The company also has 750,000 shares of 6 percent preferred stock with a par value of $100 per share, and 2.5 million shares of common stock outstanding. The preferred stock sells for $64 a share. The common stock has a beta of 1.21 and sells for $44 a share. The U.S. Treasury bill is yielding 2.3 percent and the return on the market is 11.2 percent. The corporate tax rate is 34 percent. What is the firm's weighted average cost of capital?

Answer 1

Answer:

Weighted average cost of capital= 9.69%

Explanation:

Price Assumptions are:

Bond = $1,000

Preferred stock = $100

Common Stock = $10

- Cost of Debt(Kd) = 7.5 x (1 - 0.34) = 4.95%

- Cost of preferred stock = 6 / 64 = 9.375%

- Cost of Equity = 2.3 + (11.2 - 2.3) x 1.21 = 13.069%

- Value of Debt = $75,000,000

Value of preferred stock = 750,000 x 64 = $48,000,000

Value of common stock = 2,500,000 x 44 = $110,000,000

Total Capital Employed = $233,000,000

- WACC = [(75,000,000 x 4.95%) + (48,000,000 x 9.375%) + (110,000,000 x 13.069%)] / 233,000,000

= 9.69%