Western Electric has 32,000 shares of common stock outstanding at a price per sh

Question

Western Electric has 32,000 shares of common stock outstanding at a price per share of $79 and a rate of return of 3.0 percent. The r ha 7: $95.00 per share. The preferred stock has a par value of $100. The outstanding debt has a total ace value of 4040 O and currenti se s form is the firm's weighted average cost of capital if the tax rate is 39 percent? ? shares of 80 percent pret ed to outstandin a a rice of ercent of ace e eld to maturity on he debts·D8 percent what 0 0.73% 11 11% 10.30% 52% ? 11.49%

Explanation / Answer

a. Cost of common Stock 13.00% b. Cost of preferred Stock = Preferred Dividend/Current Price = (100*7.80%)/95 = 8.21% c. After Tax cost of debt = before Tax cost of debt*(1-Tax Rate) = 8.08%*(1-0.39) = 4.93% d. Calculation of Weight of eacg component: Component Quantity Prie per unit Total Value Weight Common Stock        32,000 $ 79 $       25,28,000         0.689 Preferred Stock           7,300 $ 95 $          6,93,500         0.189 Debt $          4,48,440         0.122 (404000*111%) Total $       36,69,940 1.000 c. Calculation of weighted Average cost of capital Component Weight Cost Weighted Cost Common Stock           0.689 13.00% 8.95% Preferred Stock           0.189 8.21% 1.55% Debt           0.122 4.93% 0.60% Total 11.11% Thus, Weighted Average cost of Capital 11.11%

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