Question

2. Premier Care Corporation (PCC) has long term debt at 5% in the amount of $20...

2. Premier Care Corporation (PCC) has long term debt at 5% in the amount of $20 million. Equity totals $30 million. PCC’s marginal tax rate is 40%, and the commonly used beta for the industry is 1.2 while government securities are paying 2%. The market returns 9% on average. What is XYZ’s weighted average cost of capital using the Capital Asset Pricing Method?

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Answer #1
First we will calculate Required rate of return
Formula is Re=Rf +beta( Rm-Rf)
wherein
Rf=risk free rate
Re=required rate
Rf= risk premium
Re=.02+(1.2*(.09-.02)) 0.104
Required rate 10.4%
ans 2
WACC=(cost of equity*equity/(debt+equity))+(Cost of debt*(1- tax rate)*debt/(D+e)
((.104*(30000000/50000000))+(.05*(1-.4)*20000000/50000000)) 0.0744
WACC=7.44% answer
If any doubt please comment
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