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05-07-2019

Product code Finance-PH360

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   Total market value of firm= market value of equity + market value of preferred + market value of equity=\$7b+\$3b+\$10b= \$20b   Weight of equity = market value of equity/market value of firm: 7b/20b= 0.35   Weight of preferred = market value of preferred/market value of firm: 3b/20b= 0.15   Weight of debt = market value of debt/market value of firm: 10b/20b= 0.50 Market Capitalization Weight Equity (E) \$7 billion 0.35 Preferred (P) \$3 billion 0.15 Debt (D) \$10 billion .50 Total \$20 billion 1

 Ford Company Weight Cost After-tax Marginal Weight Equity (E) X = Preferred (P) X = Debt (D) X = Total X =

Calculation of Weighted Average Cost of Capital:- Re Cost of Equity Risk Free Rate 4 Risk Premimum 7 Beta of the stock 1.8

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