Question

Consolidated Appliances has a Beta of 0.85, the risk-free interest rate is 2.5%, and the equity risk premium is 5.5%. The yield to maturity on Consolidated Appliances debt is 4.65%. The company is financed 58% with equity, and 42% with debt, and has a tax rate of 21%. What is the WACC for consolidated Appliances?

Please use excel, this is how I need to answer it and it's confusing to me

Answer #1

Cost of debt | ||||||

Cost of debt | 4.65% | |||||

Tax rate | 21% | |||||

After-tax cost of debt | =4.65%*(1-21%) | |||||

After-tax cost of debt | 3.67% | |||||

Cost of equity stock | ||||||

Cost of equity= | Risk free rate + beta * Market risk premium | |||||

Cost of equity= | 2.5% + 0.85 * 5.5% | |||||

Cost of equity= | 7.175% | |||||

Calculation of WACC | ||||||

Cost | Weight | Weighted cost | ||||

A | C=Capital component/Total capital | D=A*C | ||||

Debt | 3.67% | 42.00% | 1.54% | |||

Equity | 7.18% | 58.00% | 4.16% | |||

Total capital | Total WACC | 5.70% | ||||

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