Use the following data to answer the question: • The company has a target capital structure of 40% debt and 60% equity

Finance Jan 04, 2021

Use the following data to answer the question:

• The company has a target capital structure of 40% debt and 60% equity. • Bonds with face value of $1,000 pay a 10% coupon (semiannual), mature in 20 years, and sell for $849.54

• The company stock beta is 1.2.

• Risk-free rate is 10%.The average return on the market is 15%.

• The company is a constant-growth firm that just paid a dividend of $2, sells for $27 per share, and has a growth rate of 8%.

• The company's marginal tax rate is 40%.

a-Calculate the weighted average cost of capital (WACC )of the company

b-What happens to a company's weighted average cost of capital (WACC) if the firm's corporate tax rate increases?

Expert Solution

1.
=40%*RATE(20*2,10%*1000,2-849.54,1000)*2*(1-40%)+60%*((10%+1.2*(15%-10%))+(2*1.08/27+8%))/2
=15.28%

2.
WACC decreases

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