Question

Western Electric has 33,500 shares of common stock outstanding at a price per share of $82 and a rate of return of 12.85 percent. The firm has 7,450 shares of 8.10 percent preferred stock outstanding at a price of $96.50 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $413,000 and currently sells for 112.5 percent of face. The yield to maturity on the debt is 8.17 percent. What is the firm's weighted average cost of capital if the tax rate is 39 percent

Answer 1

11.05

Step-by-step explanation:

WACC is the average cost of capital of the firm based on the weightage of the debt and weightage of the equity multiplied to their respective costs.

Formula for WACC

Weighted Average Cost of Capital = (Cost of Equity x Weightage of equity) + (Cost of preferred Stock x Weightage of preferred Stock ) + (Cost of Debt (1 -t) x Weightage of Debt)

Market Value

Equity = 33,500 x $82 = $2,747,000

Preferred Stock = 7,450 x $96.50 = $718,925

Debt = $413,000 x 112.5% = $464,625

Total Value = $2,747,000 + $718,925 + $464,625 = $3,930,550

Cost of Equity = 12.85%

Cost of Preferred stock = 8.1%

Cost of Debt = 8.17%

Placing values in the formula

Weighted Average Cost of Capital = (12.85% x $2,747,000 / $3,930,550) + (8.1% x $718,625 / $3,930,550 ) + (8.17% (1 - 0.39) x $464,625 / $3,930,550)

Weighted Average Cost of Capital = 8.98% + 1.48% + 0.59% = 11.05%