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The market value of Fords' equity, preferred? stock, and debt are $7 ?billion, $1 ?billion, and $14 ?billion, respectively
The market value of Fords' equity, preferred? stock, and debt are $7 ?billion, $1 ?billion, and $14 ?billion, respectively. Ford has a beta of 1.3?, the market risk premium is 8?%, and the?risk-free rate of interest is 4?%. ? Ford's preferred stock pays a dividend of $2 each year and trades at a price of $25 per share. ?Ford's debt trades with a yield to maturity of 8.5?%. What is?Ford's weighted average cost of capital if its tax rate is 25?%?
A. 9.9?%
B. 9?%
C. 10.8?%
D. 9.45?%
Expert Solution
Please find the answer as follows:
Cost of Equity = 4 + 1.3*(8) = 14.4%
Cost of Preferred Stock = 2/25 = 8%
Cost of Debt = 8.5*(1-.25) = 6.375%
WACC = 7/(7+1+14)*14.4 + 1/(7+1+14)*8 + 14/(7+1+14)*6.375
=9%
Answer is 9%
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