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Ford Problem

Ford's equity is worth $7 billion, preferred stock is $3 billion, and debt is $10 billion. Given Ford's beta of 1.8, market risk premium of 7%, and risk-free rate of 4%, its weighted average cost of capital is calculated using the market values and costs of its equity, preferred stock paying $3.5 annually trading at $27, and debt yielding 9.5% while accounting for a 30% tax rate.

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69 views1 page

Ford Problem

Ford's equity is worth $7 billion, preferred stock is $3 billion, and debt is $10 billion. Given Ford's beta of 1.8, market risk premium of 7%, and risk-free rate of 4%, its weighted average cost of capital is calculated using the market values and costs of its equity, preferred stock paying $3.5 annually trading at $27, and debt yielding 9.5% while accounting for a 30% tax rate.

Uploaded by

rishi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Financial Management

Ford Company
Capital Budgeting Problem

The market value of Fords' equity, preferred stock and debt are $7 billion, $3 billion, and $10
billion, respectively. Ford has a beta of 1.8, the market risk premium is 7%, and the risk-free rate
of interest is 4%. Ford's preferred stock pays a dividend of $3.5 each year and trades at a price of
$27 per share. Ford's debt trades with a yield to maturity of 9.5%. What is Ford's weighted
average cost of capital if its tax rate is 30%?

Ford Company

Market
Capitalization Weight

Equity (E)
Preferred (P)
Debt (D)

Total

Ford Company

After-tax
Marginal
Weight Cost Weight

Equity (E) X =
Preferred (P) X =
Debt (D) X =

Total X =

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