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Corporation wants to determine its current market value weighted-average cost of capital. The market value of...

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%

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Homework Answers

Answer #1

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

R = Rf + B ( Rm - Rf)

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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