Question

1. Acrobat Corporation has 40% debt and 60% equity on its balance sheet.

a.) Solve for Acrobat’s cost of debt if it has a 2% probability of default, a Loss Given Default of 55%, the risk-free rate is 2% and a tax rate of 21% (4 points).

b.) Solve for Acrobat’s cost of equity if it has an equity beta of 1.5 and the market risk premium is 5.5% (4 points).

c.) Solve for Acrobat’s weighted average cost of capital (WACC) (4 points)

Answer 1