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The company has a target D/E ratio = 2/3. ⚫ Bonds with face value of $1,000...

The company has a target D/E ratio = 2/3. ⚫ Bonds with face value of $1,000 pay a 10% coupon, mature in 20 years, and sell for $849.54. ⚫ The company stock beta is 1.2. ⚫ Risk-free rate is 10%, and market risk premium is 5%. ⚫ 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%. What is the company’s weighted average cost of capital? A. 10.7% B. 12.5% C. 14.4% D. 11.6%

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Answer #1

Answer: Option B:- 12.5%

(Explanation:-

If we have rounded off the yield to maturity to 12%, then WACC would be 12.48%, which is almost 12.5%.

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