Question

Parole Co. has 74,228 bonds outstanding that are selling at par value. The bonds yield 8.5 percent. The company also has 5.4 million shares of common stock outstanding. The stock has a beta of 1.35 and sells for $44.7 a share. The U.S. Treasury bill is yielding 4.8 percent and the market risk premium is 7.9 percent. Parole's tax rate is 32 percent. What is the firm's weighted average cost of capital? Enter answer in percents.

Answer 1

	Computation of post tax cost of debt
			=8.5%*(1-32%)
			5.78%
	Computation of cost of equity using CAPM
	cost of equity = risk free rate + market risk premium *beta
		=4.8%+7.9%*1.35
		15.465%
	Computation of WACC
	Source	Market value		Value weight	Cost of captial	Weight * cost
	Equity	241380000	5400000*44.7	76.48%	15.465%	11.83%
	Debt	74228000	74228*1000	23.52%	5.78%	1.36%
		315608000				13.19%
	thefore WACC =			13.19%