Question

The expected return on the market is 13.96 percent, the risk-free rate is 3.66 percent, and the tax rate is 35 percent.  Fairfax Paint has 1,400,000 common shares outstanding that are priced at 30 dollars per share and have an expected return of 15.15 percent and an expected real return of 13.44 percent. Last year, Fairfax Paint common stock had a return of 17.02 percent. The company also has 600,000 shares of preferred stock outstanding that are priced at 15 dollars per share and have an expected return of 12.41 percent and an expected real return of 10.74 percent. Last year, Fairfax Paint preferred stock had a return of 13.73 percent. Finally, the company has 10,000 bonds outstanding with a coupon rate of 7.16 percent, yield-to-maturity of 3.41 percent, current yield of 4.77 percent, face value of 1000 dollars, and price of 1,500 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

Answer :

Particulars	Cost %	Market value	Market value of weights	WACC ( Cost % * Weights )
Common stock	15.15%	$ 42,000,000	0.6363	0.0964
		( 1,400,000 * 30 )
Debt	2.22%	$ 15,000,000	0.2273	0.0050
	[ 3.41% * ( 1 - 35% ) ]	( 10,000 * 1500 )
Preferred stock	12.41%	$ 9,000,000	0.1364	0.0169
		( 600,000 * 15 )
	Total =>	$ 66,000,000	1.0000	0.1183

Therefore, Weighted average cost of capital ( WACC ) is 0.1183.