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%?

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of equity:

rE = rRF + β × (rM - rRF)
rE = 0.04 + 1.8 × 0.07
rE = 0.172 or 17.2%

Next, we need to calculate the cost of preferred stock:

rPS = D / P
rPS = 3.5 / 27
rPS = 0.1296 or 12.96%

Then, we need to calculate the cost of debt:

rD = YTM
rD = 0.095 or 9.5%

Next, we need to calculate the weights of each component:

wE = $7 billion / ($7 billion + $3 billion + $10 billion)
wE = 0.35 or 35%

wPS = $3 billion / ($7 billion + $3 billion + $10 billion)
wPS = 0.15 or 15%

wD = $10 billion / ($7 billion + $3 billion + $10 billion)
wD = 0.5 or 50%

Finally, we can calculate the weighted average cost of capital:

WACC = wE × rE + wPS × rPS + wD × rD × (1 - t)
WACC = 0.35 × 0.172 + 0.15 × 0.1296 + 0.5 × 0.095 × (1 - 0.3)
WACC = 0.1108 or 11.08%

Therefore, the best choice is C, 11.08%.

The Market Value of Fords' Equity,preferred Stock and Debt Are