Explore BrainMass
Share

Explore BrainMass

    Ford Company Capital Budgeting Project Mini-case

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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

    Weight Cost After-tax
    Marginal Weight

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

    Total X =

    © BrainMass Inc. brainmass.com October 10, 2019, 7:54 am ad1c9bdddf
    https://brainmass.com/business/finance/ford-company-capital-budgeting-project-mini-case-600037

    Attachments

    Solution Preview

    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) $7,000,000,000 35%
    Preferred (P) 3,000,000,000 15%
    Debt (D) 10,000,000,000 50%
    Total $20,000,000,000 100%

    Cost of Equity (Common Shares) using CAPM
    Cost of Equity = Risk Free Rate + Beta × Market Risk ...

    Solution Summary

    This solution shows how to calculate the weighted average cost of capital (WACC). The solution shows a step by step approach to calculating cost of debt, cost of preferred stock and the cost of common stock using CAPM. Lastly, the solution highlights where they may be risks in the calculation (how the calculation may change over time), how the weighted average cost of capital should be applied when making cost of capital project decisions, and some scenarios that may change the weighted average cost of capital at some future point.

    $2.19