The market value of Fords' equity, preferred stock, and debt are $ 7 billion, $ 2 billion, and $ 13 billion, respectively. Ford has a beta of 1.7 , the market risk premium is 8 %, and the risk-free rate of interest is 3 %. Ford's preferred stock pays a dividend of $ 3 each year and trades at a price of $ 27 per share. Ford's debt trades with a yield to maturity of 7 %. What is Ford's weighted average cost of capital if its tax rate is 35 %?

Answer: 9.48%

Explanation:

Given Data

Debts;

$7 billion

$2 billion

$13 billion

Beta of Fords stock = Beta = 1.50

Market risk premium = Rp = 8.0%

Risk free rate of interest = Rf = 4.0%

Equity rate = 1.7

Market risk rate = 0.8

Risk free rate = 0.03

Therefore;

Cost of Equity (Re) = Risk free rate + equity rate * market risk premium

= 0.03 + (1.7 * 0.8)

= 0.166

Preferred Stock Cost (PSC) = Dividend : stock price

= 4 : 30

= 0.1333

Total debt = 13 + 6 + 2 = 21 billion

D% = 13 billion : 21 billion

= 0.619

E% = 6 billion : 21 billion

= 0.286

P% = 2 billion : 21 billion

= 0.095

RD = debt capital at 8% maturity rate

Tc = 30%

Rwac = (w / preferred stock)

= Re * E% + PSC * P% + Rd (1 - Tc) D%

Rwac = (0.166) (0.286) + (0.1333) (0.095) + (0.08) (1 - 0.3) * (0.619)

= 0.094803 * 100

= 9.48%

At 30% tax rate Ford weighted average cost is 9.48%