Question

Western Electric has 28,000 shares of common stock outstanding at a price per share of $71 and a rate of return of 13.40 percent. The firm has 6,900 shares of 7.00 percent preferred stock outstanding at a price of $91.00 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $380,000 and currently sells for 107 percent of face. The yield to maturity on the debt is 7.84 percent. What is the firm's weighted average cost of capital if the tax rate is 39 percent

Answer 1

Answer: 11.05%

Step-by-step explanation:

The weighted average cost of capital is calculated as follows:

= (Weight of debt * after tax cost of debt) + (weight of equity * cost of equity) + (weight of preferred stock * cost of preferred stock)

Total equity = 28,000 * 71 = $1,988,000

Total preferred stock = 6,900 * 91 = $627,900

Total debt = 380,000 * 107 = $406,600

Total = 1,988,000 + 627,900 + 406,600

= $3,022,500

Cost of preferred stock = Dividend / Current price = 7 / 91 = 7.69%

After tax cost of debt = 7.84% * (1 - 39%) = 4.78%

WACC = (406,000 / 3,022,500 * 4.78%) + (1,988,000 / 3,022,500 * 13.40%) + (627,900 / 3,022,500 * 7.69%)

= 11.05%