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Your firm is has equity of $1,000,000
Your firm is has equity of $1,000,000.00 and debt of $2,200,000.00. The firm has been estimated to have a beta of 1.00 and the expected market risk premium (MRP) is 7.88% with the risk-free rate at 1.82%. The firm just recently issued bonds which traded at $951.42 on it’s issue date and they have a 10-year maturity (assume standard corporate bonds). The stated rate on the bonds was 3.60%. What is your firm’s weighted average cost of capital (WACC) if the tax rate is 35.00%? (enter your value as a percent (i.e. 20.5 for 20.5%) tolerance is 0.1)
Expert Solution
Using CAPM Model,
Cost of Equity = 0.0182 + 1(0.0788)
Cost of Equity = 9.70%
Calculating Cost of Debt,
Using TVm Calculation,
I = [PV = -951.42, FV = 1,000, PMT = 36, N = 10]
I = 4.21%
Weight of Equity = 1,000,000/(2,200,000 + 1,000,000) = 31.25%
Weight of Debt = 2,200,000/(1,000,000 + 2,200,000) = 68.75%
WACC = 0.3125(0.097) + (1 - 0.35)(0.6875)(0.0421)
WACC = 4.91%
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