Kilborn Corporation’s balance sheet is shown below. The current rate on treasury

Question

Kilborn Corporation’s balance sheet is shown below. The current rate on treasury bonds is 7%. The yield to maturity on Kilborn’s bonds is 10%. Assume a market risk premium of 8%. Kilborn’s tax rate is 40%. Kilborn’s stock price is $45, and it has 2 million shares outstanding. Kilborn’s beta is unknown because it only recently went public, but it is known that a comparable firm’s stock has a beta of 1.2 and that the comparable firm’s debt ratio (D/(D+E)) is 0.4. What is the weighted-average cost of capital for Kilborn Corporation?

Explanation / Answer

WACC = Wd×Rd×(1-t)+We×Ke+Wp×Rp W is weights of respective portfolios R is return on respective portfolios Cost of equity 16.60% 0.07+1.2*0.08 After tax cost of debt 6.00% 0.1*(1-40%) Equity weight                                     0.71 1/1.4 Debt weight                                     0.29 0.4/1.4 WACC 13.57%

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.