The weighted average cost of capital (WACC) of the company.

Question

Want to see the full answer?

Answer 1

Question

Chapter 13, Problem 2QP

Summary Introduction

To compute: The weighted average cost of capital (WACC) of the company.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

You have the following information on a company on which to base your calculations and discussion: Cost of equity capital (rE) = 18.55% Cost of debt (rD) = 7.85% Expected market premium (rM –rF) = 8.35% Risk-free rate (rF) = 5.95% Inflation = 0% Corporate tax rate (TC) = 35% Current long-term and target debt-equity ratio (D:E) = 2:5 a. What are the equity beta (bE) and debt beta (bD) of the firm described above?[Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.] b. What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio? c. What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)

Here is some information about Stokenchurch Inc.: Beta of common stock = 1.2 Treasury bill rate = 4% Market risk premium = 6.5% Yield to maturity on long-term debt = 7% Book value of equity = $340 million Market value of equity = $680 million Long-term debt outstanding = $680 million Corporate tax rate = 21% What is the company's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) WACC %

Here is some information about Stokenchurch Inc.: Beta of common stock = 1.5 Treasury bill rate = 4% Market risk premium = 6.8% Yield to maturity on long-term debt = 9% Book value of equity = $370 million Market value of equity = $740 million Long-term debt outstanding = $740 million Corporate tax rate = 21% What is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)