Directions: You MUST show ALL of your work to receive credit on the problems. Th

Question

Directions: You MUST show ALL of your work to receive credit on the problems. There will be significant point reductions if you do not show your work. All calculations should be completed to at least 2 decimal places.

What is a firm's weighted-average cost of capital if the stock has a beta of 1.45, Treasury bills yield 5%, and the market portfolio offers an expected return of 14%? In addition to equity, the firm finances 30% of its assets with debt that has a yield to maturity of 9%. The firm is in the 35% marginal tax bracket.

Explanation / Answer

Cost of Equity=Ke=Rf+Beta*(MRP)=5+1.45*(14-5)=18.05%

WACC=We*Ke+Wd*Kd*(1-tax)=0.7*18.05+0.3*9*(1-0.35)=14.39%

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