Question

Western Electric has 25,000 shares of common stock outstanding at a price per share of $65 and a rate of return of 13.70 percent. The firm has 6,600 shares of 6.40 percent preferred stock outstanding at a price of $88.00 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $362,000 and currently sells for 104 percent of face. The yield to maturity on the debt is 7.66 percent. What is the firm's weighted average cost of capital if the tax rate is 39 percent

Answer 1

Answer:

Value of Equity = 25,000 * $65 = $1,625,000

Value of Preferred Stock = 6,600 * $88 = $580,800

Value of Debt = 362,000 / 100 * 104 = $376,480

Value of Firm = $1,625,000 + $580,800 + $376,480

Value of Firm = $2,582,280

Weight of Equity = 1,625,000/ 2,582,280 = 0.6293

Weight of Preferred Stock = 580,800/ 2,582,280 = 0.2249

Weight of Debt = 376,480/ 2,582,280 = 0.1458

After Tax cost of Preferred Stock = 6.40 * (1- 0.39) = 3.904%

After tax Cost of Debt = 7.66* (1- 0.39) = 4.6726%

Weighted Average Cost of Capital = (0.6293 * 13.70) + (0.2249 * 3.904) + (0.1458 * 4.6726)

Weighted Average Cost of Capital = 8.6214 + 0.8780 + 0.6713

Weighted Average Cost of capital = 10.18% or 10.14%( nearest)