Question

Western Electric has 33,000 shares of common stock outstanding at a price per share of $81 and a rate of return of 12.90 percent. The firm has 7,400 shares of 8.00 percent preferred stock outstanding at a price of $96.00 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $410,000 and currently sells for 112 percent of face. The yield to maturity on the debt is 8.14 percent. What is the firm's weighted average cost of capital if the tax rate is 35 percent

Answer 1

The market value of common stock = Current price of the common stock  * Number of common shares outstanding

The market value of common stock = 81 * 33,000 = $2,673,000

The market value of preferred stock = Current price of the preferred stock * Number of preferred shares outstanding

The market value of preferred stock = 96 * 7,400 = $710,400

The market value of the debt = Face value * (1 + Selling price percent)

The market value of the debt = 410,000 * (1 + 0.112) = $455,920

Total market value of the firm = 2,673,000 + 710,400 + 455,920

Total market value of the firm = $3,839,320

Weight of common stock, We = 2,673,000/3,839,320 = 0.6962170384

Weight of preferred stock, Wp = 710,400/3,839,320 = 0.1850327662

Weight of debt, Wd = 455,920/3,839,320 = 0.1187501953

Cost of common stock, re = 0.1290

Cost of preferred stock, rp = Dividend/Price = 8/96 = 0.08333333333

Cost of debt, rd = 0.0814

Tax rate = 0.35