Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds w
ID: 2739865 • Letter: P
Question
Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 7.5 percent. The company also has 750,000 shares of 7 percent preferred stock 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 cost of equity is 14.06 percent. The corporate tax rate is 38 percent. What is the firm's weighted average cost of capital?
A) 10.15
B) 10.64
C) 11.18
D) 11.30
Explanation / Answer
ANSWER= B) 10.64%
Weighted average cost of capital = cost of equity * weight of equity + cost of debt * weight of debt + cost of preferred stock * weight of preferred stock
= 14.06% * .45 + 7.5%*(1- 0.38) * .34 + 10.77% * .21
= 10.64% (approx)
Re= 0.1406
Rp= (0.07*$100)/$65 = 0.1077
Rb = Int* (1-tax) = .075(1-.38) = 0.0465
80000000 /233750000 * 100
= 34%
48750000 / 233750000 * 100
= 21%
105000000/ 233750000 *100
=45%
Weight Bond 80000*1000 8000000080000000 /233750000 * 100
= 34%
Preferred stock 750000*65 4875000048750000 / 233750000 * 100
= 21%
Common stock 2500000*42 105000000105000000/ 233750000 *100
=45%
233750000