Phillips Equipment has 6,500 bonds outstanding that are selling at 96.5 percent of par. Bonds with...

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Phillips Equipment has 6,500 bonds outstanding that are sellingat 96.5 percent of par. Bonds with similar characteristics areyielding 6.7 percent, pretax. The company also has 48,000 shares of5.5 percent preferred stock and 75,000 shares of common stockoutstanding. The preferred stock sells for $64 a share. The commonstock has a beta of 1.32 and sells for $41 a share. The preferredstock has a stated value of $100. The U.S. Treasury bill isyielding 2.2 percent and the return on the market is 10.6 percent.The corporate tax rate is 21 percent. What is the weighted averagecost of capital?
9.30 percent
8.09 percent
10.18 percent
8.64 percent
Please show work, thank you!

Answer & Explanation Solved by verified expert

4.5 Ratings (907 Votes)

Assuming face value of bond to be 1000 Price of bond 0965 1000 965 Market value of bond 6500 965 6272500 Market value of preferred stock 48000 64 3072000 Market value of common See Answer

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Phillips Equipment has 6,500 bonds outstanding that are sellingat 96.5 percent of par. Bonds with similar characteristics areyielding 6.7 percent, pretax. The company also has 48,000 shares of5.5 percent preferred stock and 75,000 shares of common stockoutstanding. The preferred stock sells for $64 a share. The commonstock has a beta of 1.32 and sells for $41 a share. The preferredstock has a stated value of $100. The U.S. Treasury bill isyielding 2.2 percent and the return on the market is 10.6 percent.The corporate tax rate is 21 percent. What is the weighted averagecost of capital?9.30 percent8.09 percent10.18 percent8.64 percentPlease show work, thank you!