Question

Parole Co. has 76,464 bonds outstanding that are selling at par value. The bonds yield 8.8 percent. The company also has 4.3 million shares of common stock outstanding. The stock has a beta of 1.12 and sells for $48 a share. The U.S. Treasury bill is yielding 3.6 percent and the market risk premium is 7.9 percent. Parole's tax rate is 38 percent. What is the firm's weighted average cost of capital?

Enter answer in percents.

Answer 1

	Post tax cost of debt = 8.8%*(1-38%)
				5.456%
	Cost of common stock = risk free rate+ market risk premium * beta
			=3.6%+7.9%*1.12
			12.4480%
	Computation of WACC
	Source	market value		market weight	cost of capital	weight * cost
	Debt	76464000	76464*1000	27.03%	5.456%	1.47%
	common stock	206400000	4.3mil*48	72.97%	12.4480%	9.08%
		282864000				10.56%
	WACc =	10.56%