The market value of Fords' equity, preferred stock and debt are $ 6 billion, $ 2 billion, and $ 12 billion, respectively. Fo

Question

2 years ago

8

The market value of Fords' equity, preferred stock and debt are $ 6 billion, $ 2 billion, and $ 12 billion, respectively. Fo

rd has a beta of 1.8, the market risk premium is 8%, and the risk-free rate of interest is 4%. Ford's preferred stock pays a dividend of $ 2.50 each year and trades at a price of $ 25 per share. Ford's debt trades with a yield to maturity of 10%. What is Ford's weighted average cost of capital if its tax rate is 40%?

Business

1 answer:

aniked [119] · Answer 1 · 2022-05-29T05:25:48+03:00

Answer:

10.12 %

Explanation:

Weighted Average Cost of Capital (WACC) is the cost of permanent sources of capital pooled together. It shows the risk of the business and is used to evaluate projects.

WACC = Cost of equity x Weight of Equity + Cost of Debt x Weight of Debt + Cost of Preference Stock x Weight of Preference Stock

Remember to use the After tax cost of debt :

After tax cost of debt = Interest x (1 - tax rate)

= 10% x ( 1 - 0.40)

= 6.00 %

Cost of equity :

Cost of equity = Return from Risk free security + Beta x Risk Premium

= 4.00 % + 1.8 x 8.00%

= 18.40 %

Cost of Preference Stock :

Cost of Preference Stock = Dividend / Market return x 100

= $2.50 / $ 25 x 100

= 10%

therefore,

WACC = 18.40 % x 30 % + 6.00 % x 60 % + 10.00% x 10%

= 10.12 %

thus,

Ford's weighted average cost of capital is 10.12 %

The market value of​ Fords' equity, preferred stock and debt are $ 6 ​billion, $ 2 ​billion, and $ 12 ​billion, respectively. Fo

The market value of Fords' equity, preferred stock and debt are $ 6 billion, $ 2 billion, and $ 12 billion, respectively. Fo