Western Electric has 23,000 shares of common stock outstanding at a price per sh

Question

Western Electric has 23,000 shares of common stock outstanding at a price per share of $57 and a rate of return of 14.2 percent. The firm has 6,000 shares of 7 percent preferred stock outstanding at a price of $48 a share. The preferred stock has a par value of $100. The company also has 350 corporate bonds, each with $1000 par value, and the bond currently sells for 102 percent of face. The yield-to-maturity on the debt is 8.49 percent.

What is the firm's weighted average cost of capital if the tax rate is 34 percent?

12.69%

13.44%

14.47%

14.19%

A.

12.69%

B.

13.44%

C.

14.47%

D.

14.19%

Explanation / Answer

Answer is a 12.69%

Stock Number Market Value per share Market Value Weight Return Weighted return Common Stock                       23,000.00                     57.00         1,311,000.0000                          0.6702 14.20% 9.52% Preffered Stock Price                         6,000.00                     48.00             288,000.0000                          0.1472 14.58% 2.15% Bond                             350.00               1,020.00             357,000.0000                          0.1825 5.60% 1.02%                       29,350.00         1,956,000.0000                          1.0000 12.69% Return on prefernce share                                  7.00 Price                               48.00 Return %(Preference dividend/ Preference shares)(7/48) 14.58% YTM 8.49% Tax Rate 34% Return on debt (8.49%(1-.34) 5.60%

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