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Consolidated Appliances has a Beta of 0
Consolidated Appliances has a Beta of 0.85, the risk-free interest rate is 2.5%, and the equity risk premium is 5.5%. The yield to maturity on Consolidated Appliances debt is 4.65%. The company is financed 58% with equity, and 42% with debt, and has a tax rate of 21%. What is the WACC for consolidated Appliances?
Expert Solution
Answer:
Cost of Equity = risk Free Rate + Beta * Equity Risk Premium
Cost of Equity = 0.025 + 0.85*0.055
Cost of Equity = 0.025 + 0.0468
Cost of Equity = 0.0718
Before tax Cost of Debt = 4.65%
After tax Cost of Debt = Before tax Cost of Debt * (1-tax rate)
After tax Cost of Debt = 0.0465 * (1-0.21)
After tax Cost of Debt = 0.0367
Weight of Debt = 0.42
Weight of Equity = 0.58
WACC = Weight of Debt * After tax Cost of Debt + Weight of Equity * Cost of Equity
WACC = 0.42 * 0.0367 + 0.58 * 0.0718
WACC = 0.0571 or 5.71%
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