Question

Meiston Press has a debt- equity ration of 1.40. the pre-tax cost of debt is 8.80 percent and the cost of equity is 13.7 percent. What is the firms weighted average cost of capital (WACC) is the tax rate is 34 percent? 9.10, 9.88, 10.25, 11.13

you own a stock portfolio invested 25 percent in Stock Q, 20 petcent in stock R, 5 percent in Stock S, and 50 percent im stock t. The betas for these four stocks are 153, 1.1, 0.59, and 0.71 respectively. What is the portfolio beta? 1.01, 0.97, 0.99, 1.04

Answer 1

Weighted Average cost of capital = [Wd*Kd]+[We*Ke]

Wd = Weight of debt = 1.40/2.40

We = Weight of Equity = 1/2.40

Kd = Cost of debt = Pre tax cost of debt*[1-tax rate] = 0.0880*[1-0.34] = 0.0581 = 5.81%

Ke = Cost of equity = 13.70%

Weighted Average cost of capital = [1.40/2.40*5.81]+[1/2.40*13.70] = 3.39+5.71 = 9.10%

Weighted Average cost of capital = 9.10%

Stock	Weight	Beta	Weighted Beta [weight*Beta]
Q	0.25	1.53	0.38
R	0.20	1.10	0.22
S	0.05	0.59	0.03
T	0.50	0.71	0.36
Portfolio Beta	0.99

Portfolio Beta = 0.99