Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital.Its current capital structure has a 30% weight in equity,10% in preferred stock,and 60% in debt.The cost of equity capital is 17%,the cost of preferred stock is 11%,and the pretax cost of debt is 8%.What is the weighted average cost of capital for Ford if its marginal tax rate is 30%?
A)9.56%
B)9.96%
C)10.25%
D)10.73%
E)11.54%

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is calculated by multiplying the cost of each capital component by its proportional weight in the capital structure and summing the results.

WACC = (0.3 x 0.17) + (0.1 x 0.11) + (0.6 x 0.08 x (1-0.3))

WACC = 0.051 + 0.011 + 0.0384

WACC = 0.1004 or 10.04%

However, this calculation is based on Ford's current capital structure. If the company wants to recapitalize and change its capital structure, the weights of the different components will change, and therefore, the WACC will also change. Therefore, the best choice may depend on the specific changes that Ford is considering.

Ford Motor Company Is Discussing New Ways to Recapitalize the Firm