A firm has a capital structure containing 60 percent debt and 40 percent common

Question

A firm has a capital structure containing 60 percent debt and 40 percent common stock equity. Its outstanding bonds offer investors a 6.5 percent yield to maturity. The risk-free rate currently equals 5 percent, and the expected risk premium on the market portfolio equals 6 percent. The firm’s common stock beta is 1.20.

a. What is the firm’s required return on equity?

b. Ignoring taxes, use your finding in part a to calculate the firm’s WACC.

c. Assuming a 40 percent marginal tax rate, recalculate the firm’s WACC found in part b.

d. Compare and contrast the values for the firm’s WACC found in parts b and c.

Explanation / Answer

a. What is the firm

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