Question

The expected return on the market is 14.89 percent, the risk-free rate is 5.45 percent, and the tax rate is 20 percent.  Fairfax Paint has 1,000,000 common shares outstanding that are priced at 25 dollars per share and have an expected return of 15.24 percent and an expected real return of 13.09 percent. Last year, Fairfax Paint common stock had a return of 16.77 percent. The company also has 400,000 shares of preferred stock outstanding that are priced at 15 dollars per share and have an expected return of 12.78 percent and an expected real return of 10.68 percent. Last year, Fairfax Paint preferred stock had a return of 14.58 percent. Finally, the company has 20,000 bonds outstanding with a coupon rate of 9.68 percent, yield-to-maturity of 4.4 percent, current yield of 8.07 percent, face value of 1000 dollars, and price of 1,200 dollars. 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.

Answer 1

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