Question

g Western Electric has 27,500 shares of common stock outstanding at a price per share of $70 and a rate of return of 13.45 percent. The firm has 6,850 shares of 6.90 percent preferred stock outstanding at a price of $90.50 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $377,000 and currently sells for 106.5 percent of face. The yield to maturity on the debt is 7.81 percent. What is the firm's weighted average cost of capital if the tax rate is 35 percent

Answer 1

The WACC is 10.93%

Step-by-step explanation:

The WACC or weighted average cost of capital is the cost of a firm's capital structure. The capital stricture may be formed of the following components namely debt, preferred stock and common stock. The WACC assigns the weights to each of these components based on the finance provided by each of the above components as a proportion of total capital structure or total assets.

The WACC is calculated by taking the market value of each component. The formula for WACC is as follows,

WACC = wD * rD * (1-tax rate) + wP * rP + wE * rE

Where,

• w represents the weight of each component
• r represents the cost of each component
• D, P and E represents debt, preferred stock and Common stock respectively.
• We take after tax cost of debt. So we multiply rD with (1-tax rate)

Debt = 377000 * 106.5% = $401505

Preferred stock = 6850 * 90.50 = $619925

Common stock = 27500 * 70 = $1925000

Total assets = 401505 + 619925 + 1925000 = $2946430

WACC = 401505/2946430 * 7.81% * (1-0.35) + 619925/2946430 * 6.9% +

1925000/2946430 * 13.45%

WACC = 0.1093 or 10.93%