Fairfax Paint has 1,000,000 common shares outstanding that are priced at 20 doll
ID: 2768514 • Letter: F
Question
Fairfax Paint has 1,000,000 common shares outstanding that are priced at 20 dollars per share and have an expected return of 15.55 percent and an expected real return ot 13 65 percent The company also has 400,000 shares of preferred stock outstanding that are priced at 20 dollars per share and have an expected return of 11.84 percent and an expected real return of 10 percent Finally, the company has 10 000 bonds outstanding with a coupon rate of 6 26 percent, yield-to-maturity of 3 48 percent current yield of 4 17 percent, face value of 1000 dollars, and price of 1,500 dollars The expected return on the market is 13 96 percent, the risk free rate is 4 24 percent and the tax rate is 20 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 0098Explanation / Answer
Market value of equity = price* number of shares = 1*20= 20m
Market value of prefered equity = price* number of shares = 0.4*20= 8m
Market value of debt = number of bonds*par value* price in terms of par = 10000*1500 = 15m
WACC = cost of debt*(1-tax rate)*MV of debt/(MV of debt+MV of equity + MV of preferred equity)+
cost of equity*MV of equity/(MV of debt+MV of equity + MV of preferred equity)+
cost of preferred equity/*MV of preferred equtiy/(MV of debt+MV of equity + MV of preferred equity)
=3.48*(1-0.2)*15/(15+8+20)+11.84*8/(15+8+20)+15.55*20/(15+8+20)
=10.41%
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