Fairfax Paint has 1,000,000 common shares outstanding that are priced at 20 doll

Question

Fairfax Paint has 1,000,000 common shares outstanding that are priced at 20 dollars per share and have an expected return of 19.36 percent and an expected real return of 17.05 percent. The company also has 800,000 shares of preferred stock outstanding that are priced at 10 dollars per share and have an expected return of 10.2 percent and an expected real return of 8.07 percent. Finally, the company has 10,000 bonds outstanding with a coupon rate of 10.39 percent, yield-to-maturity of 5.77 percent, current yield of 6.93 percent, face value of 1000 dollars, and price of 1,500 dollars. The expected return on the market is 15.29 percent, the risk free rate is 3.66 percent, and the tax rate is 15 percent. What is the weighted average cost of capital for Fairfax Paint? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Explanation / Answer

Fairfax Instruments : WACC calculation   Type of Capital No of securities Outstanding   Price per stock/bond Total Market Value $ % weight of values   Cost of Capital Tax Rate =T Post Tax cost =Cost*(1-T) Weighted post tax cost =Weight of market value *Post Tax cost of capital Common shares            1,000,000                20       20,000,000 46.51% 19.36% 15% 19.36% 9.00% Preferred stock                800,000                10          8,000,000 18.60% 10.20% 15% 10.20% 1.90% Bonds                  10,000          1,500       15,000,000 34.88% 5.77% 15% 4.90% 1.71% Total       43,000,000 12.61% So WACC of the cpmpany is 12.61%

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