Question

Red Dirt Industries has a capital structure made up of 25 percent debt and 75 percent common equity. Red Dirt’s bonds have a $1,000 par value, a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,025. Red Dirt’s beta is 2.2, the risk-free rate is 3 percent, and the market risk premium is 6 percent. Red Dirt just paid a dividend of $2.00. The firm’s stock price is $18.00. The firm's marginal tax rate is 40 percent. Calculate Red Dirt’s weighted average cost of capital (WACC).

Answer #1

Amount | weight | cost | weight*cost | |

equity | 75.00 | 0.7500 | 16.2000% | 0.1215 |

debt | 25.00 | 0.2500 | 7.0047% | 0.0175 |

WACC = 13.90%

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