The market value of Fords\' equity, preferred stock and debt are $7 billion, $3
ID: 2749700 • Letter: T
Question
The market value of Fords' equity, preferred stock and debt are $7 billion, $3 billion, and $10 billion, respectively. Ford has a beta of 1.8, the market risk premium is 7%, and the risk-free rate of interest is 4%. Ford's preferred stock pays a dividend of $3.5 each year and trades at a price of $27 per share. Ford's debt trades with a yield to maturity of 9.5%. What is Ford's weighted average cost of capital if its tax rate is 30%?
Ford Company
Market Capitalization Weight
Equity (E) ________________ ________
Preferred (P) ________________ ________
Debt (D) ________________ ________
Total _________________ ________
Ford Company
Weight Cost After tax Marginal Weight
Equity (E) _______ X _______ = ____________________
Preferred (P) ________ X _______ = _____________________
Debt (D) ________ X _______ = _____________________
Total ________ X = _____________________
Explanation / Answer
Statement showing Weight Particulars Market Capitalisation Weight WN Equity 7,000,000,000.00 0.35 7b/20b Preferred 3,000,000,000.00 0.15 3b/20b Debt 10,000,000,000.00 0.50 10b/20b Total 20,000,000,000.00 1.00 Statement showing WACC Particulars Weight Cost After Tax Marginal Equity 0.35 16.60% 5.81% Preferred 0.15 12.96% 1.94% Debt 0.50 6.65% 3.33% Total 1.00 WACC 11.08% ke =Rf + B(RP) ke = 4% + 1.8*7% ke = 4% + 12.60% ke = 16.60% kp = 3.5/27 kp = 12.96% kd = 9.5%(1-.30) kd = 6.65%
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