Finance hm
pcwc0506ford_problem.docx
Financial Management
Ford Company
Capital Budgeting Problem
The market value of Fords' equity, preferred stock and debt are $7 billion, $3 billion, and $10 billion, respectively. Ford has a beta of 1.8, the market risk premium is 7%, and the risk-free rate of interest is 4%. Ford's preferred stock pays a dividend of $3.5 each year and trades at a price of $27 per share. Ford's debt trades with a yield to maturity of 9.5%. What is Ford's weighted average cost of capital if its tax rate is 30%?
Ford Company |
||||
|
||||
|
|
Market Capitalization |
|
Weight |
|
|
|
|
|
Equity (E) |
|
|
|
|
Preferred (P) |
|
|
|
|
Debt (D) |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
Ford Company |
||||||
|
|
|
|
|
|
|
|
|
Weight |
|
Cost |
|
After-tax Marginal Weight |
|
|
|
|
|
|
|
Equity (E) |
|
|
X |
|
= |
|
Preferred (P) |
|
|
X |
|
= |
|
Debt (D) |
|
|
X |
|
= |
|
|
|
|
|
|
|
|
|
|
X |
|
= |
|