"Phillips Equipment has 80,000 bonds outstanding that are selling at par. Face value of the bonds is $1000. Bonds with similar characteristics are yielding 7.5%. The company also has 750,000 shares of 7% preferred stock (stated value=$100) and 2.5 million shares of common stock outstanding. The preferred stock sells for $65 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding 2.8% and the return on the market is 11.2%. The corporate tax rate is 38%. What is the firm's weighted average cost of capital?"

Question

03-05-2021
Business

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"Phillips Equipment has 80,000 bonds outstanding that are selling at par. Face value of the bonds is $1000. Bonds with similar characteristics are yielding 7.5%. The company also has 750,000 shares of 7% preferred stock (stated value=$100) and 2.5 million shares of common stock outstanding. The preferred stock sells for $65 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding 2.8% and the return on the market is 11.2%. The corporate tax rate is 38%. What is the firm's weighted average cost of capital?"

Sagot :

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Zviko Zviko · Answer 1 · 2021-05-04T20:24:46-04:00

Answer:

9.27 %

Explanation:

weighted average cost of capital = Cost of equity x Weight of Equity + Cost of Debt x Weight of Debt + Cost of Preference Stock x Weight of Preference Stock

therefore,

weighted average cost of capital = 14,056 % x 44.92 %+ 4.65 % x 32.25% + 7.00 % x 20.86%

= 9.27 %

where,

cost of equity = risk free rate + beta x market premium

= 14.056%

Sagot :

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