Question

Use the appropriate information provided below to estimate a weighted average cost of capital for a...

Use the appropriate information provided below to estimate a weighted average cost of capital for a project with a planning life of about 10 years.

Tax rate used for future estimates = 33.0%

Current yield to maturity on company bonds = 5.78%

Current yield on US Treasury bills = 1.73%

Current yield on 10-year Treasury note = 3.76%

Total assets = $560465

Current liabilities = $77696

Long-term debt = $95098

Shareholders' equity = $385213

Estimated market risk premium = 6.94%

Current company beta = 0.87

Recent stock price = $34.78

For this problem, you must enter your answer as a PERCENT, rounded to the nearest second decimal.

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Answer #1

Weighted average cost of capital (WACC) = Cost of debt (Kd) * Weight of debt (Wd) + Cost of equity (Ke) 8 Weight of equity (We)

Cost of debt (Kd) = Current yield to maturity on company bonds*(1-tax rate )= 5.78%*(1-0.33) = 3.8726%

Cost of equity (Ke) = Rf + beta*Market risk premium = 1.73 (T-bill rate) + 0.87*6.94% = 7.7678%

Total long term debt = 95098

Total equity = 385213

Total of debt and equity = 480,311

Weight of Equity (We) =385213/480311 = 0.8020

Weight of Debt (Wd) = 0.1980

WACC = 0.1980*3.8726 + 0.8020*7.7678 = 6.9965%

Weighted average cost of capital = 6.996% or 7.00%

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