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
             
    Weight   Cost   After-tax

Marginal Weight

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

 

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