Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital.Its current capital structure has a 20% weight in equity,10% in preferred stock,and 70% in debt.The cost of equity capital is 14%,the cost of preferred stock is 10%,and the pretax cost of debt is 9%.What is the weighted average cost of capital for Ford if its marginal tax rate is 30%?
A)7.87%
B)8.21%
C)8.89%
D)9.21%
E)10.14%

Question

Quizplus · Accepted Answer

First, we need to calculate the weighted average cost of capital (WACC) using the formula:

WACC = (E/V * Re) + (P/V * Rp) + (D/V * Rd * (1 - T))

where:
E/V = percentage of capital structure that is equity
Re = cost of equity
P/V = percentage of capital structure that is preferred stock
Rp = cost of preferred stock
D/V = percentage of capital structure that is debt
Rd = pretax cost of debt
T = marginal tax rate

Plugging in the given values, we get:

WACC = (0.2 * 0.14) + (0.1 * 0.1) + (0.7 * 0.09 * (1 - 0.3))
WACC = 0.028 + 0.01 + 0.0441
WACC = 0.0821 or 8.21%

Therefore, the best choice is B.

Ford Motor Company Is Discussing New Ways to Recapitalize the Firm