Question

A company has a beta of 2.0, pre-tax cost of debt of 5.1% and an
effective corporate tax rate of 29%. 31% of its capital structure
is debt and the rest is equity. The current risk-free rate is 0.7%
and the expected market **risk premium** is 5.7%. What
is this company's weighted average cost of capital? Answer in
percent, rounded to two decimal places.

Answer #1

**Weighted Average Cost of Capital**

**WACC = Ke * % Weights + Kd * %
weights**

**= 1.4%*69%+ 3.62%*31%**

**= 0.97+ 1.12**

**= 2.09% (Answer)**

Particulars |
Percentage Contribution in total Capital(Weights)(in
%) |
Cost of Capital(in %) |
Weighted Average Cost of Capital(in %) |

Equity | 69 | 1.4 | 0.97 |

Debt | 31 | 3.62 | 1.12 |

**Working Notes**

**1) Cost of capital of equity (Ke)**

Ke = Rf + B(Rm - Rf)

where,

Ke is the cost of capital of equity, Rf is risk free rate of return, B is beta and (Rm - Rf) is Expected market risk premium

So,

**Ke = 0.7+2(5.7) = 1.4%**

**2) Cost of capital of debt (Kd)**

Here we have pre tax cost of debt = 5.1% and tax rate = 29%

**After tax cost of debt(Kd) = pre tax debt rate(1- tax
rate)**

**= 5.1(1-.29) = 3.62%**

A company has a beta of 0.9, pre-tax cost of debt of 5.2% and an
effective corporate tax rate of 30%. 24% of its capital structure
is debt and the rest is equity. The current risk-free rate is 1.0%
and the expected market return is 6.9%. What is this company's
weighted average cost of capital? Answ

Isabella Publishing's tax rate is 21%, its beta is 1.40, and it
currently has no debt. The CFO is considering moving to a capital
structure with 25% debt and 75% equity and using the newly raised
capital to repurchase shares of the common stock. If the risk-free
rate is 4.5% and the market risk premium is 7.0%, by how much would
the cost of equity for the levered firm increase, compared to the
cost of equity of the unlevered firm?...

Luna Corporation has a beta of 1.5, £10 billion in equity, and
£5 billion in debt with an interest rate of 4%. Assume a risk-free
rate of 0.5% and a market risk premium of 6%. Calculate the WACC
without tax.
Queen Corporation has a debt-to-equity ratio of 1.8. If it had
no debt, its cost of equity would be 16%. Its current cost of debt
is 10%. What is the cost of equity for the firm if the corporate
tax...

Dunkin currently has a capital structure of 60 percent debt and
40 percent equity, but is considering a new product that will be
produced and marketed by a separate division. The new division will
have a capital structure of 80 percent debt and 20 percent equity.
Dunkin has a current beta of 2.1, but is not sure what the beta for
the new division will be. AMX is a firm that produces a product
similar to the product under consideration...

Epson has one bond outstanding with a yield to maturity of 7%
and a coupon rate of 8%. The company has no preferred stock.
Epson's beta is 1.3, the risk-free rate is 0.5% and the expected
market risk premium is 6%.
Epson has a target debt/equity ratio of 0.7 and a marginal tax
rate of 34%.
What is Epson's (pre-tax) cost of debt?
What is Epson's cost of equity?
What is Epson's capital structure weight for equity, i.e., the
fraction...

Meiston Press has a debt- equity ration of 1.40. the pre-tax cost
of debt is 8.80 percent and the cost of equity is 13.7 percent.
What is the firms weighted average cost of capital (WACC) is the
tax rate is 34 percent? 9.10, 9.88, 10.25, 11.13
you own a stock portfolio invested 25 percent in Stock Q, 20
petcent in stock R, 5 percent in Stock S, and 50 percent im stock
t. The betas for these four stocks are...

Firm Why has a capital structure based on market values of 40
percent debt and the rest common equity. You know that the coupon
rate on the debt is 8 percent and the yield to maturity on the debt
is 9.3 percent. You also know that the common equity beta is 1.54,
the market risk premium is 5.5 percent and the risk-free rate is 2
percent, and the tax rate is 40 percent. Find Firm Why's WACC.
Input your answer...

Williamson, Inc., has a debt?equity ratio of 2.48. The company's
weighted average cost of capital is 10 percent, and its pretax cost
of debt is 6 percent. The corporate tax rate is 35 percent. a. What
is the company's cost of equity capital? (Do not round intermediate
calculations. Enter your answer as a percent rounded to 2 decimal
places, e.g., 32.16.) Cost of equity capital % b. What is the
company's unlevered cost of equity capital? (Do not round
intermediate...

Ganado's Cost of Capital. Maria Gonzalez, Ganado's Chief
Financial Officer, estimates the risk-free rate to be 3.40 %,
the company's credit risk premium is 4.20%, the domestic beta is
estimated at 1.12, the international beta is estimated at 0.88,
and the company's capital structure is now 25% debt. The expected
rate of return on the market portfolio held by a well-diversified
domestic investor is 9.60% and the expected return on a larger
globally integrated equity market portfolio is 8.60 %....

Consider a company that has β equity = 1.5 and β debt = 0.4.
Suppose that the risk-free rate of interest is 6 percent, the
expected return on the market E(rM) = 15 percent, and the corporate
tax rate is 40 percent. If the company has 40 percent equity and 60
percent debt in its capital structure, calculate its weighted
average cost of capital using both the classic CAPM and the
tax-adjusted CAPM.

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 37 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago

asked 3 hours ago

asked 4 hours ago