Question

Ford Motors is in this situation: EBIT = $ 180 million Tax rate, T = 40% Outstanding debt = 100 million rd = 11.3% rs = 15.7% Outstanding shares = 800,000 Book value per share = $ 100 All profits are distributed in dividend form. Debt is made up of perpetual bonds. 1. What is Ford Motor's earnings per share (DFL) and price per share (PO) amount? 2. Calculate Ford Motor's WACC.

Answer 1

1) Ford motors earning per share

Given is EBIT = $180 Million and Tax rate =40% we can find Net profit by simply deducting interest and taxes form EBIT

Net Profit = EBIT - Interst - Taxes

Interest = 100 Million x 11.3% = $11.3 Million

Taxes = (180 -11.3) x 40% = $ 67.48 Million

Net profit = 180 - 11.3 - 67.48

Net profit = 101.22 Million

Now, Earning Per Share (EPS) = Net Profit/No of shares o/s

EPS = 101220000 / 800000

EPS = $126.525 per share

We cannot find price per share due to lack of information.

2. WACC

WACC formula = (Debt/Total Capital X cost of debt) + (Equity/Total Capital X cost of equity)

We have given rd that is cost of debt and rs that is cost of equity

we will simply calculate after tax cost of debt by using below formula

After tax cost of debt (Rd) = cost of debt (1 - T)

Rd = 11.3 X (1-0.4) = 6.78%

now we have after tax cost of debt and cost of equity as given in the sum we can calculate WACC by using below formula

WACC formula = ((Debt/Total Capital) X cost of debt) + ((Equity/Total Capital) X cost of equity)

WACC = ((100/180) X 6.78%) + ((80/180) X 15.7%)

WACC = 3.77 + 6.98 = 10.75%