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Homework answers / question archive / A firm is funded with $500 million in equity and $475 million in debt
A firm is funded with $500 million in equity and $475 million in debt. The yield to maturity on bonds issued by the firm is 7.85%. The tax rate is 40%. The firm has a beta of 1.15. The risk-free rate is 5%, and the market risk premium is 9%. The weighted average cost of capital for this firm is:
Cost of debt after-tax=YTM*(1-tax rate)
=7.85*(1-0.4)
=4.71%
Cost of equity=risk free rate+Beta*market risk premium
=5+(9*1.15)
=15.35%
Total value=(500+475)=$975 million
WACC=Respective cost*Respective weight
=(500/975*15.35)+(475/975*4.71)
=10.17%(approx)
