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 outstanding debt has a total face value of $350,000 and 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?

Explanation / Answer

Weighted average cost of capital = Cost of equity * Weighatge of equity + Cost of preferred stock * Weighatge of preferred stock + Cost of debt * Weighatge of debt * (1 - tax rate)

= [14.2% * ($57*23,000) + (7*100%/$48) * ($48*6,000) + 8.49% * $350,000 * (1 - 34%)] / ($57*23,000 + $48*6,000 + $350,000)

= ($186,162 + $42,000 + $19,612) / $1,949,000

= 12.71%

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