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

question 10

Multiple Choice

Assume the market value of Fords' equity, preferred stock and debt are $6 billion, $3 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 $2.50 each year and trades at a price of $30 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 35%?

• A) 9.78%
• B) 10.24%
• C) 9.31%
• D) 11.18%

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Definitions:

Liabilities

Financial obligations or debts that a company owes to external parties.

Cash Dividend

A cash dividend is a payment made by a company out of its earnings to shareholders in the form of cash.

Stockholders Equity

The residual interest in the assets of a corporation after deducting liabilities, representing ownership value.

Assets

Economic resources owned by a business or individual that are expected to provide future benefits.