The market value of Fords\' equity, preferred stock and debt are $7 billion, $3
ID: 2772838 • Letter: T
Question
The market value of Fords' equity, preferred stock and debt are $7 billion, $3 billion, and $10 billion, respectively. Ford has a beta of 1.8, the market risk premium is 7%, and the risk-free rate of interest is 4%. Ford's preferred stock pays a dividend of $3.5 each year and trades at a price of $27 per share. Ford's debt trades with a yield to maturity of 9.5%. What is Ford's weighted average cost of capital if its tax rate is 30%?
Given this worksheet to fill out.
Ford Company
Market Capitalization
Weight
Equity (E)
Preferred (P)
Debt (D)
Total
Ford Company
Weight
Cost
After-tax
Marginal Weight
Equity (E)
X
=
Preferred (P)
X
=
Debt (D)
X
=
Total
X
=
Ford Company
Market Capitalization
Weight
Equity (E)
Preferred (P)
Debt (D)
Total
Explanation / Answer
Market Capitalization Weight Equity (E) 7 0.35 Preferred (P) 3 0.15 Debt (D) 10 0.5 Total 20 1 Cost of equity = Risk free rate + beta* market risk premium = 4 + 1.8*7 = 16.6 Cost of preferred equity = Dividend/ price =3.5/27* 12.96296 Cost of debt= YTM*(1-tax rate) =9.5*(1-.3) 6.65 Ford Company Weight Cost After-tax Marginal Weight Equity (E) 0.35 X 16.6 = 5.81 Preferred (P) 0.15 X 12.96 = 1.944 Debt (D) 0.5 X 6.65 = 3.325 Total X = 11.08
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.