Inc. is estimating it\'s WACC. Capital structure is 40% debt, 60% common equity.
ID: 2756079 • Letter: I
Question
Inc. is estimating it's WACC. Capital structure is 40% debt, 60% common equity. Company has bought 10 shares outstanding with an 8% annual coupon that are trading at par. Company's tax rate is 35%. Risk free rate is 5%, market risk is 6%, and stock's beta is 1.2. What is company's WACC? Inc. is estimating it's WACC. Capital structure is 40% debt, 60% common equity. Company has bought 10 shares outstanding with an 8% annual coupon that are trading at par. Company's tax rate is 35%. Risk free rate is 5%, market risk is 6%, and stock's beta is 1.2. What is company's WACC? Capital structure is 40% debt, 60% common equity. Company has bought 10 shares outstanding with an 8% annual coupon that are trading at par. Company's tax rate is 35%. Risk free rate is 5%, market risk is 6%, and stock's beta is 1.2. What is company's WACC?Explanation / Answer
Cost of equity using Capital asset pricing equation
cost of equity = risk free + beta*market risk
= 5% + 1.2*6%
= 12.2%
cost of debt = 8% as its trading at par
Weighted average cost of capital(WACC) = weight of equity*cost of equity + weight of debt*cost of debt*(1-tax)
= 60%*12.2% + 40%*8%*(1-35%)=9.4%