Question

Western Electric has 25,000 shares of common stock outstanding at a price per share of $57 and a rate of return of 14.2 percent. The firm has 7,000 shares of 7 percent preferred stock outstanding at a price of $48 a share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $350,000 and currently sells for 102 percent of face. The yield-to-maturity on the debt is 8.49 percent. What is the firm's weighted average cost of capital if the tax rate is 30 percent?

*NEED IN EXCEL FORMAT*

Answer 1

Please see the table below. Please be guided by the column M to understand the mathematics. The cell highlighted in yellow is your answer. Figures in parenthesis, if any, mean negative values. All financials are in $. Adjacent cells in blue contain the formula in excel I have used to get the final output.

M N S Component Market Value Vi к 13 Common Stock 14 Number 15 Price 16 Market value 17 Cost of equity 25,000 57 1,425,000 '=L14*L15 14.20% Common Stock Preferred Stock Debt Total 1,425,000 336,000 357,000 2,118,000 PO W eight Post tax cost component cost Wi = Vi / Total V Ki Wix Ki 67.28% 14.20% 9.55% '=P15*Q15 15.86% 14.58% 2.31% =P16*016 16.86% 5.94% 1.00% '=P17*Q17 100.00% 12.87% '=SUM(R15:R17) 18 100 7% 7,000 336,000 '=L22*L23 14.58% '=L20*L21/L22 19 Preferred Stock 20 Par value 21 Dividend rate 22 Price 23 Number 24 Market Value 25 Cost of preferred stock 26 27 Debt 28 Face Value 29 Market price 30 Market value 31 Pre tax cost of debt 32 Tax rate 33 Post tax cost of debt 350,000 102% 357,000 '=L28*L29 8.49% 30% 5.94% '=L31*(1-L32)

Answer 2

SOLUTION  (In word document) :

CORREC ANSWER :

EQUITY :

Market value of equity = E = No. of shares * MV per share = 25000 * 57 = 1425000 ($)

Return on equity = rE = 14.20 %

PREFERRED STOCK :

Market value of Preferred stock = PS = No. Of shares * MV = 7000 * 48 = 336000 ($)

Return on PS = rP = 7 / 48 = 0.1458 = 14.58 % 

DEBT :

Market value of debt = D = FV * price per $ of FV = 350000 * 102/100 = 357000 ($) 

Effective interest on debt = rD =  YTM * (1 - T) = 8.49 * (1 - 0.3) = 5.94 % 

TOTAL CAPITA MV BASED :

Total capital as per MV = C = E + PS + D = 1425000 + 336000 + 357000 = 2118000 ($)

WEIGHTS OF CAPITAL COMPONENTS :

Weight of equity = wE = E / C = 1425000 / 2118000 = 0.6728

Weight of PS = wPS = PS / C = 336000 / 2118000 = 0.1586 

Weight of debt = wD = D / C = 357000 / 2118000 = 0.1686 

WEIGHED AVERAGE CAPITAL COST ;

WACC 

= wE * rE + wPS * rPS + wD * rD 

= 0.6728 * 14.20 + 0.1586 * 14.58 + 0.1686 * 5.94

= 12.87 % approx.:   (ANSWER)