Assume the market value of Fords' equity, preferred stock, and debt are$6 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 $4 each year and trades at a price of $30 per share. Ford's debt trades with a yield to maturity of 8.0%. What is Ford's weighted average cost of capital if its tax rate is 30%

Explanation:

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

Cost of equity (Re) = 0.03+(1.7*0.08)

Cost of equity (Re) = 0.03 + 0.136

Cost of equity (Re) = 0.166

Cost of preferred stock (Rpfd) = Dividend/stock price

Cost of preferred stock (Rpfd) = 4/30

Cost of preferred stock (Rpfd) = 0.1333

==> 6 billion + 2 billion + 13 billion = 21 billion

Debt % = 13 billion / 21 billion = 0.619 \

Equity % = 6 billion / 21 billion = 0.286

Preferred stock % = 2 billion / 21 billion = 0.095

Debt capital (Rd) = Its comes from yield to maturity of 8%

Tax rate= 30%

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

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

WACC = 0.047476 + 0.0126635 + 0.034664

WACC = 0.0948035

WACC = 9.48%

So, Ford's weighted average cost of capital is 9.48%

i'ts proportional. if the inflation rate is 12% for example, the cpi will be 12% less.

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bioteacher101