Assume the Market Value of Fords' Equity, Preferred Stock, and Debt

question 79

Multiple Choice

Assume the market value of Fords' equity, preferred stock, and debt are$6 billion, $2 billion, and $13 billion, respectively. Ford has a beta of 1.7, the market risk premium is 8%, and the risk-free rate of interest is 3%. Ford's preferred stock pays a dividend of $4 each year and trades at a price of $30 per share. Ford's debt trades with a yield to maturity of 8.0%. What is Ford's weighted average cost of capital if its tax rate is 30%?

• A) 9.95%
• B) 9.48%
• C) 10.43%
• D) 11.38%

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Definitions:

Break-Even Sales Revenue

The amount of revenue needed to cover all fixed and variable costs of a business.

Safety Margin

The difference between the actual performance or capacity of a system and its expected or required performance, serving as a buffer for uncertainty.

Fixed Costs

Expenses that do not change with the level of production or sales over a short period, such as rent or salaries.

Unit Contribution Margin

The amount by which the selling price of a unit exceeds its variable cost, often used to assess the profitability of individual products.