solution

Listen Austrian MotorWorks (AMW) has the following capital structure: • 700,000 shares of common stock, which were issued at a price of $20 per share, and currently trade on the capital markets at $42 per share. The stock has a beta of 1.20 • 50,000 shares of 5.5% preferred stock, which were issued at par of $75 and currently trade on the capital markets at $77 per share. • 20,000 4% semi-annual bonds with a par value of $1,000 each. The bonds have 17 years to maturity and currently sell for $980. AMW’s marginal tax rate is 30%. The return from the market 9.0%; and the risk-free rate is 2.0% a. What is the firm’s capital structure based on market values? (2 marks) b. What is AMW’s (after-tax) cost of common stock? (2 marks) c. What is AMW’s (after-tax) cost of preferred stock? (2 marks) d. What is AMW’s (after-tax) cost of debt? (2 marks) e. Calculate AMW’s weighted average cost of capital.