Question

Western Electric has 26,500 shares of common stock outstanding at a price per share of $68 and a rate of return of 13.55 percent. The firm has 6,750 shares of 6.70 percent preferred stock outstanding at a price of $89.50 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $371,000 and currently sells for 105.5 percent of face. The yield to maturity on the debt is 7.75 percent. What is the firm's weighted average cost of capital if the tax rate is 39 percent?

Answer 1

Answer:

11.12%

Explanation:

Computation of the given data are as follow:-

Value of Common Stock= 26,500 × $68 = $1,802,000

Value of Preferred Stock = 6,750 × $89.50 =$604,125

Outstanding Debt = Total Face Value of Debt × Current Sale Percent

= $371,000 × 105.5 ÷ 100 = $391,405  

Total Value = Value of Common Stock + Value of Preferred Stock + Outstanding Debt

= $1,802,000 + $604,125 + $391,405

=$2,797,530

Weighted Average Cost of Capital (WACC) = (Common Stock ÷ Total Value) × Rate of Return of Common Stock + (Preferred Stock ÷ Total Value) × Fixed Dividend Rate of Preferred Stock × 100 ÷ Preferred Stock Price + (Outstanding Debt ÷ Total Value) × Yield of Maturity of Debt × (1 - Wacc Rate)

= ( $1,802,000 ÷ $2,797,530) × 0.136 + ($604,125$ ÷ $2,797,530) × 0.067 × 100 ÷ $89.50 + ($391,405 ÷ $2,797,530) × 0.0775 × (1 -.39)

= 0.088 + 0.0162 + 0.007

= 0.1112 or 11.12%