Determine the weighted average cost of capital for a firm given the following in

Question

Determine the weighted average cost of capital for a firm given the following information:

Equity Information

200,000 shares; stock price of $73

Beta of 1.54; Risk-free rate of 4%; Risk premium of 6%

Debt Information

Outstanding $3 million; Pre-tax cost of debt of 6.5%; tax rate of 30%

Please show calculation.

Equity Information

200,000 shares; stock price of $73

Beta of 1.54; Risk-free rate of 4%; Risk premium of 6%

Debt Information

Outstanding $3 million; Pre-tax cost of debt of 6.5%; tax rate of 30%

Explanation / Answer

Cost of Equity=Riskfree Rate+Beta*Risk Premium=4+1.54*6 (A) 13.24 Cost of debt=(1-Tax Rate)*Interest Rate=(1-0.30)*6.5 ( B) 4.55 Value of shares=200000*73 (C) 14600000 Value of Bonds(D) 3000000 WACC=(A*C+B*D)/(C+D) 11.76

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