Question

Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital. Its current capital structure has a ​% weight in​ equity, ​% in preferred​ stock, and ​% in debt. The cost of equity capital is ​%, the cost of preferred stock is ​%, and the pretax cost of debt is ​%. What is the weighted average cost of capital for Ford if its marginal tax rate is ​%?

Answer 1

Complete Question:

Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital. Its current capital structure has a 10% weight in equity, 25% in preferred stock, and 65% in debt. The cost of equity capital is 17%, the cost of preferred stock is 11%, and the pretax cost of debt is 9%. What is the weighted average cost of capital for Ford if its marginal tax rate is 40%?

Answer:

7.96%

Step-by-step explanation:

We can calculate WACC using the formula:

WACC = Cost of equity * Equity %age / 100% +

After Tax Cost of Debt * Debt %age / 100% +

Cost of Preferred Stock * Preferred Stock %age / 100%

Here,

Cost of equity is 17%

Cost of preferred stock is 11%

Post tax cost of debt = Pre-Tax cost * (1 - Tax rate)

This implies,

Post tax cost of debt = 9% * (1 - 40%) = 5.4%

Equity weight is 10% weight in equity

Preferred stock weight is 25%

Debt Weight is 65%

By putting value in the formula given in the attachment, we have:

WACC = 17% * (10% / 100%) + 11% * (25% / 100%) + 5.4% * (65% / 100%)

WACC = 1.7% + 2.75% + 3.51%

WACC = 7.96%