Reference no: EM133578617

Question

USF Equipment Inc. has 6,500 bonds outstanding that are selling at 96.5 percent of par. Bonds with similar characteristics are yielding 6.7 percent, pretax. The company also has 48,000 shares of 5.5 percent preferred stock and 75,000 shares of common stock outstanding. The preferred stock sells for $64 a share. The common stock has a beta of 1.32 and sells for $65.1 a share. The preferred stock has a stated value of $100. The U.S. Treasury bill is yielding 2.2 percent and the return on the market is 10.6 percent. The corporate tax rate is 23 percent. What is the weighted average cost of capital? The 5.5 percent in the preferred stock is used to calculate a dividend and then divide that dividend by the current price of preferred. 5.5% x $100 = $5.5 dividend / $64 = .085938 or 8.5938% return on preferred stock.