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

Question

2 years ago

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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] · Answer 1 · 2022-04-18T10:00:36+03:00

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 %

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

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