Question

Assume the market value of Fords' ordinary equity, preference share, and debt are $6 billion, $2 billion, and $13 billion, respectively. Ford’s equity has a beta of 1.7, the market risk premium is 8%, and the risk-free rate of interest is 3%. Ford's preference share pays a dividend of $4 each year and trades at a price of $30 per share. Ford's debt trades with a yield to maturity of 8.0%. What is Ford's weighted average cost of capital if its tax rate is 30%?

Answer 1

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Answer:

6 billion + 2 billion + 13 billion = 21 billion

Re-> cost of equity= Risk free rate + equity rate * market risk premium

Re= .03+(1.7*0.08)= 0.166R

pfd-> cost of preferred stock= Dividend/stock price

Rpfd= 4/30= .1333

D%= 13billion/21billion= .619

E%= 6billion/21billion= .286

P%= 2 billion/21billion= .095

Rd=debt capital comes from yield to maturity of 8% (YTM is an estimate of debt capital)

Tc= 30%

Rwacc=(w/ preferred stock)= Re*E%+Rpfd*P%+Rd(1-Tc)D%

Rwacc=(.166)(.286)+(.1333)(.095)+(0.08)(1-(.3))(.619)= .094803 ie 9.48%