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)        




Ford Company
    Weight   Cost   After-tax

Marginal Weight

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