Question

Corporation wants to determine its current market value weighted-average cost of capital. The market value of the firm's bonds is $1.5 million and the bond yield is 12.00%. Company has 125,000 shares of common stock outstanding and the current market price is $40 per share. The firm's tax rate is 30% and its beta is 1.2. The U.S. T-bill rate of return is 6.00% and the total market index rate of return is 11.00%. What is Company's market value weighted-average cost of capital?

Select one:

A. 10.40%

B. 11.17%

C. 12.00%

D. 13.12%

Answer #1

The Cost of equity will be calculating by use of CAPM model

R = R_{f} + B ( R_{m} - R_{f})

R = 12%

Cost of debt = yield (1- tax) = 8.4%

WACC =(Cost of Equity * Total Equity + cost of Debt * TotalDebt) / Total capital

= 11.17% , Option B.

Cost of Equity | Amount of Equity | |||||||

Riskfree rate | 6.00% | Shares | 125000 | |||||

Beta | 1.20 | Price | 40 | |||||

Market return | 11% | Value | 5000000 | |||||

Cost of Equity | 12.00% | |||||||

Cost of Debt | Amount of Debt | |||||||

Rate | 12.00% | Book value | 1500000 | |||||

Taxrate | 30% | Adjustment | 1 | |||||

Cost of Debt | 8.40% | Value | 1500000 | |||||

Total Capital | 6500000 | |||||||

WACC | 11.17% |

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