Question

Western Electric has 25,000 shares of common stock outstanding at a price per share of $65 and a rate of return of 13.70 percent. The firm has 6,600 shares of 6.40 percent preferred stock outstanding at a price of $88.00 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $362,000 and currently sells for 104 percent of face. The yield to maturity on the debt is 7.66 percent. What is the firm's weighted average cost of capital if the tax rate is 39 percent?

Answer 1

MV of equity=Price of equity*number of shares outstanding

MV of equity=65*25000

=1625000

MV of Bond=Par value*bonds outstanding*%age of par

MV of Bond=1000*362*1.04

=376480

MV of Preferred equity=Price*number of shares outstanding

MV of Preferred equity=88*6600

=580800

MV of firm = MV of Equity + MV of Bond+ MV of Preferred equity

=1625000+376480+580800

=2582280

Weight of equity = MV of Equity/MV of firm

Weight of equity = 1625000/2582280

W(E)=0.6293

Weight of debt = MV of Bond/MV of firm

Weight of debt = 376480/2582280

W(D)=0.1458

Weight of preferred equity = MV of preferred equity/MV of firm

Weight of preferred equity = 580800/2582280

W(PE)=0.2249

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 7.66*(1-0.39)

= 4.6726

cost of preferred equity

cost of preferred equity = Preferred dividend/price*100

cost of preferred equity = 6.4/(88)*100

=7.27

WACC=after tax cost of debt*W(D)+cost of equity*W(E)+Cost of preferred equity*W(PE)

WACC=4.67*0.1458+13.7*0.6293+7.27*0.2249

WACC =10.94%