Fairfax Paint has 1,000,000 common shares outstanding that are priced at 25 doll

Question

Fairfax Paint has 1,000,000 common shares outstanding that are priced at 25 dollars per share and have an expected return of 19.61 percent and an expected real return of 17.32 percent. The company also has 600,000 shares of preferred stock outstanding that are priced at 20 dollars per share and have an expected return of 11.11 percent and an expected real return of 8.98 percent. Finally, the company has 10,000 bonds outstanding with a coupon rate of 14.53 percent, yield-to-maturity of 6.92 percent, current yield of 11.18 percent, face value of 1000 dollars, and price of 1,300 dollars. The expected return on the market is 15 percent, the risk free rate is 4.72 percent, and the tax rate is 20 percent. What is the weighted average cost of capital for Fairfax Paint? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Explanation / Answer

Answer:

WACC = (E / E +P+D)xre + (P / E +P+D) x rp + (D / E+P+D) x rd (1-t)

here,

E = market price of equity

P = market price of preferrence stock

D = market value of bond

and their respect costs that is expected rates of return

and t is tax rate

now,

WACC = (25,000,000 / 47,000,000) x 0.1961 + (20,000,000 / 47,000,000) x 0.1111 + (10,000,000 / 47,000,000) x 0.1453 (1-0.20) = 0.1763 or 17.63%

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