Question

Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital. Its current capital structure has a 15% weight in equity, 5% in preferred stock, and 80% in debt. The cost of equity capital is 15%, the cost of preferred stock is 9%, and the pretax cost of debt is 8%. What is the weighted average cost of capital for Ford if its marginal tax rate is 30%?

Answer 1

Solution:-

After tax cost of debt = Cost of Debt * (1-tax)

After tax cost of debt = 0.08 * (1-0.30)

After tax cost of debt = 5.60%

To Calculate WACC-

WACC = Kd * Weight + Kps * Weight + Ke * Weight

WACC = 5.60% * 0.80 + 9% * 0.05 + 15% * 0.15

WACC = 4.48% + 0.45% + 2.25%

WACC = 7.18%

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