Daves Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,000.00. (2) The company's tax rate is 25%. (3) The riskfree rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20. (4) The target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any new common stock. What is its WACC? Do not round your intermediate calculations.









Cost of Equity = Risk Free Rate + Beta*(Market Risk
Premium)
= 4.50% + 1.20 (5.50%)
=4.50% + 6.60%
=11.10%
Cost of Debt after Tax = k_{d}
Here,
I = Interest paid per bond
t = tax rate in decimal form
P_{0} = Market Price of bond
OR
We have Cost of Debt = 6%
Weight of Debt in Capital structure = 35%
Cost of Equity = 11.10%
Weight of Equity in Capital structure = 100%  35% =
65%
Formula for WACC:
Here k_{d} is after tax cost of debt.
Therefore,
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