Western Electric has 23 000 shares of common stock outstanding at a price per share of $57 and a rate of return of 14.2 per cent.The firm has 6000 shares of 7 per cent preferred stock outstanding at a price of $48 a share.The preferred stock has a par value of $100.The outstanding debt has a total face value of $350 000 and currently sells for 102 per cent of face.The yield-to-maturity on the debt is 8.49 per cent.What is the firm's weighted average cost of capital if the tax rate is 34 per cent? Assume a classical tax system.

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is calculated using the formula: WACC = (E/V * Re) + (D/V * Rd * (1-Tc)) + (P/V * Rp), where E is the market value of equity, D is the market value of debt, P is the market value of preferred stock, V is the total market value of the firm's financing (E + D + P), Re is the cost of equity, Rd is the cost of debt, Rp is the cost of preferred stock, and Tc is the tax rate. Calculating each component and substituting into the formula gives a WACC of approximately 12.69%.

Western Electric Has 23 000 Shares of Common Stock Outstanding