Question

Western Electric has 28,000 shares of common stock outstanding at a price per share of $71 and a rate of return of 13.40 percent. The firm has 6,900 shares of 7.00 percent preferred stock outstanding at a price of $91.00 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $380,000 and currently sells for 107 percent of face. The yield to maturity on the debt is 7.84 percent. What is the firm's weighted average cost of capital if the tax rate is 39 percent?

10.25%

10.47%

10.67%

11.05%

11.47%

Answer 1

WACC = 11.05%

	(a)	(b)	(c = a*b)
	Amount/Shares O/S	Bond price/Share price	Market value	Weight (c/Total)
Debt	3,80,000	107%	4,06,600	13.45%
Preferred stock	6,900	91	6,27,900	20.77%
Common stock	28,000	71	19,88,000	65.77%
		Total	30,22,500

	Cost	Weight	Weighted cost
Debt	4.78%	13.45%	0.64%
Preferred stock	7.69%	20.77%	1.60%
Common stock	13.40%	65.77%	8.81%
		WACC	11.05%

Cost of debt = 7.84%*(1-39%) = 4.78%

Cost of preferred stock = dividend/current price = (7%*100)/91 = 7.69%