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saw5 [17]
3 years ago
7

The market value of​ Fords' equity, preferred​ stock, and debt are $ 7 ​billion, $ 2 ​billion, and $ 15 ​billion, respectively.

Ford has a beta of 1.2​, the market risk premium is 8​%, and the​ risk-free rate of interest is 4​%. ​ 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 8​%. What is​ Ford's weighted average cost of capital if its tax rate is 35​%?
Business
1 answer:
Stolb23 [73]3 years ago
7 0

Answer:

Ford's weighted average cost of capital is 8.22 %

Explanation:

Weighted Average Cost of Capital (WACC) is the minimum return that the company expect from a project. It shows the risk of the company.

Calculation of WACC

WACC = Cost of equity + Cost of preferred​ stock + Cost of debt

Capital Source       Market Values     Weight      Cost      Total Cost

equity                         $ 7 ​billion          29.17%      13.6%       3.97 %

preferred​ stock         $ 2 ​billion            8.33%      12%          1.00 %

debt                           $ 15 ​billion         62.50%     5.2 %       3.25%

Total                          $ 24 billion                                          8.22 %

Cost of equity = Risk free rate + Beta × Risk Premium

                       =  4% + 1.2 × 8%

                       =  13.6%

Cost of preferred​ stock = Dividend/Market Price

                                       = $ 3/ $ 25 × 100

                                       = 12%

Cost of debt = interest × (1- tax rate)

                    = 8% × (1-0.35)

                    = 5.2 %

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Henry Carr and Noreen Mason formed a partnership, dividing income as follows: annual salary allowance to Carr of $42,000; intere
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Answer:

$239,060

Explanation:

The computation of the net income distributed to Carr as follows;

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Net income                                                                              $442,000

Salary

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Interest

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left amount  $192,650 $192,650  $385,300                        $0

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You have $250,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 12.9 percent, and Stock L
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Answer:

The investment in stock H will be $104837.5 while the investment in stock L will be $145162.5

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The portfolio return is the weighted average return of the individual stocks that form up the portfolio. The weightage of each stock in the portfolio is the investment in a stock as a proportion of investment in the portfolio.

Let x be the weightage of Stock H.

Weightage of Stock L will be (1-x).

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Plugging in the values,

0.111 = x  * 0.129   +   (1-x) * 0.098

0.111 = 0.129x  +  0.098  -  0.098x

0.111- 0.098  =  0.031x

0.013 / 0.031  = x

x = 0.41935 or 41.935% rounded off to 3 decimal places

(1-x) = 1 - 0.41935  =  0.58065 or 58.065%

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