1) Rumolt Motors has 30 million shares outstanding with a price of $15 per share

Finance Nov 02, 2020

1) Rumolt Motors has 30 million shares outstanding with a price of $15 per share. In addition, Rumolt has issued bonds with a total current market value of $150 million. Suppose Rumolt's equity cost of capital is 10%, and its debt cost of capital is 5%.

a) What is Rumolt's pretax WACC?

b) If the corporate tax rate is 35%, what is its after-tax WACC?

2) An investor has a $200,000 stock portfolio. $150,000 is invested in a stock with a beta of 0.8 and the remainder is invested in a stock with a beta of 1.2. These are the only two investments in his portfolio. What is his portfolio's beta?

Expert Solution

1-a) Pretax WACC = 8.75%

1-b) After tax WACC = 8.31%

2) Portfolio's beta = 0.90

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