.Financial Management Capital Budgeting , homework help

Anonymous
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Need help with Financial Management and Capital Budgeting question

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You are provided with the following information to determine Ford’s weighted average cost of capital that will be used for capital project calculations. As a Finance Analyst for Ford, you will calculate and support the development of its weighted average cost of capital and communicate it to the CFO of Ford. After you have calculated the required data points in the two tables below, provide a brief paper (approximately 300 to 400 words) to the CFO summarizing the weighted average cost of capital you determined for Ford, where they may be risks in the calculation (how the calculation may change over time), how the weighted average cost of capital you calculated should be applied when making cost of capital project decisions, and some scenarios that the CFO should be aware of that may change the weighted average cost of capital at some future point. Your discussion of the scenarios should cover aspects of management, marketing and broader economic factors that may influence the weighted average cost of capital. Financial Management Ford Company Capital Budgeting Problem The market value of Fords' equity, preferred stock and debt are $7 billion, $3 billion, and $10 billion, respectively. Ford has a beta of 1.8, the market risk premium is 7%, and the risk-free rate of interest is 4%. Ford's preferred stock pays a dividend of $3.5 each year and trades at a price of $27 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 30%? Ford Company Market Capitalization Weight Equity (E) Preferred (P) Debt (D) Total Ford Company Weight After-tax Marginal Weight Cost Equity (E) Preferred (P) Debt (D) X X X = = = Total X = ...
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Tutor Answer

PhDjack
School: New York University

Hello buddy, Attached kindly find the answer to your question. Please review and notify if need of any edits. thanks

Running head: FINANCIAL MANAGEMENT CAPITAL BUDGETING

Weighted Average Cost of Capital (Case of Ford)
Student Name:
Professor’s Name:
School Affiliation:
Date:

1

FINANCIAL MANAGEMENT CAPITAL BUDGETING

2

Part one

Cost of Equity= Risk-Free Rate + Beta × Market risk
0.04 + 1.8 × 0.07= 0.1660

Cost of preferred stock = Annual dividend on preferred stock
Current Market Price of Preferred Stock
Cost of preferred stock will be 3.5/ 27 = 0.1296
Cost of debt = Interest rate on the debt × (100% -incremental income tax)
Cost of debt will be 9.5% × (100%- 30%) = 9.5% × 70% = 6.65% or 0.0665

Cost of equity per share= 0.1660/ 27
Cost of preferred stock per share= 0.1296/27
Cost of debt per share = 0.0665/27

Ford Company

Market
Capitalization

Weight

Equity (E)...

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Anonymous
awesome work thanks

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