pfd company has dept with a yield to maturity of 7.5% a cost of equity of 13.5% and a cost of prefered stock of 9.5% the market value of its dept prefered stock and equity are $10.5 million, $3.5million, and $24.5 million respectively nd its tax rate is 40%
To calculate the weighted average cost of capital (WACC) for PFD Company, we need to calculate the cost of each component of capital and then take a weighted average based on their respective market values.
1. Cost of Debt (kd): Given a yield to maturity of 7.5%, the cost of debt is 7.5%.
2. Cost of Equity (ke): The cost of equity is 13.5%.
3. Cost of Preferred Stock (kps): The cost of preferred stock is 9.5%.
4. Market Value of Debt (Md): The market value of debt is $10.5 million.
5. Market Value of Preferred Stock (Mps): The market value of preferred stock is $3.5 million.
6. Market Value of Equity (Me): The market value of equity is $24.5 million.
7. Tax Rate (T): The tax rate is 40%.
Now, we can calculate the weights of each component:
Weight of Debt (wd) = Market Value of Debt / Total Market Value
wd = $10.5 million / ($10.5 million + $3.5 million + $24.5 million) = $10.5 million / $38.5 million = 0.2727
Weight of Preferred Stock (wps) = Market Value of Preferred Stock / Total Market Value
wps = $3.5 million / ($10.5 million + $3.5 million + $24.5 million) = $3.5 million / $38.5 million = 0.0909
Weight of Equity (we) = Market Value of Equity / Total Market Value
we = $24.5 million / ($10.5 million + $3.5 million + $24.5 million) = $24.5 million / $38.5 million = 0.6364
Now, we can calculate the WACC:
WACC = (wd * kd * (1 - T)) + (wps * kps) + (we * ke)
WACC = (0.2727 * 0.075 * (1 - 0.40)) + (0.0909 * 0.095) + (0.6364 * 0.135)
WACC = (0.020625) + (0.008709) + (0.085764)
WACC = 0.115098 or 11.51%
Therefore, the weighted average cost of capital (WACC) for PFD Company is 11.51%.
To calculate the weighted average cost of capital (WACC) for PFD Company, we need to find the weights of each component of capital (debt, preferred stock, and equity) and then calculate the weighted average.
Step 1: Calculate the weights:
The weight of each component is determined by dividing its market value by the total market value of all components.
Weight of Debt = Market Value of Debt / Total Market Value
= $10.5 million / ($10.5 million + $3.5 million + $24.5 million)
= $10.5 million / $38.5 million
≈ 0.2727 or 27.27%
Weight of Preferred Stock = Market Value of Preferred Stock / Total Market Value
= $3.5 million / ($10.5 million + $3.5 million + $24.5 million)
= $3.5 million / $38.5 million
≈ 0.0909 or 9.09%
Weight of Equity = Market Value of Equity / Total Market Value
= $24.5 million / ($10.5 million + $3.5 million + $24.5 million)
= $24.5 million / $38.5 million
= 0.6364 or 63.64%
Step 2: Calculate the weighted average cost of capital (WACC):
WACC = (Weight of Debt * Cost of Debt) + (Weight of Preferred Stock * Cost of Preferred Stock) + (Weight of Equity * Cost of Equity)
Given:
Cost of Debt = Yield to Maturity of Debt = 7.5%
Cost of Preferred Stock = 9.5%
Cost of Equity = 13.5%
WACC = (0.2727 * 7.5%) + (0.0909 * 9.5%) + (0.6364 * 13.5%)
= 0.2048 + 0.0859 + 0.8598
= 1.1505
Therefore, the weighted average cost of capital (WACC) for PFD Company is approximately 11.51%.