Question

Western Electric has 27,000 shares of common stock outstanding at a price per share of $69 and a rate of return of 13.50 percent. The firm has 6,800 shares of 6.80 percent preferred stock outstanding at a price of $90.00 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $374,000 and currently sells for 106 percent of face. The yield to maturity on the debt is 7.78 percent. What is the firm's weighted average cost of capital if the tax rate is 40 percent

Answer 1

10.14%

Step-by-step explanation:

1) Value of common stock outstanding is $69 x 27,000 = $1,863,000

Value of preferred stock = $90 x 6,800 = $612,000

Value of debt = 374000 x 2.06 = $770,440

Total value = 1863000 + 612000 +770440 = $3245440

% of common stock = 1863000/3245440 = 57.40%

% of preferred stock = 612000 / 3245440 = 18.86%

% of debt = 770440 / 3245440 = 23.74%

2) Weighted average cost of capital = Average weight cost of equit + Average weight cost of preferred stock + Average weight cost of debt after tax

= (0.574 x 0.135) + (0.1886 x 0.068) + (0.2374 x 0.0778 x 0.6) = 10.14%