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Chrome File Edit View History Bookmarks People Window Help O 5 46% D Sat 9:49 PM = 6Student Home – XX O BADM 300 Grou xE Study Guide TES X E PracticeMarketir xo Quiz 22 x Y Nodebt Inc. is a x C Solved: WACC. I x 5 Macie E C 0 0 ezto.mheducation.com/hm.tpx E connect FINA 307 Macie Beltran Quiz 22 instructions I help rese es Question 5 (of 10) | Save & Exit Submit value: 10.00 points 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-tem debt outstanding = $740 million Corporate tax rate = 35% What is the company's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) WACC References Worksheet Difficulty: Intermediate Learning Objective: 13-03 Calculate the weighted-average cost of capital. 9OOJ DE LIZ TOG BOO 90 HET

Explanation / Answer

Calculation of WACC Source of Capital Market Value (in $ million) Weight Cost of capital Multiplication A B C D C*D Common stock $740 0.5 14.20% 0.071 Long term debt $740 0.5 5.85% 0.02925 Weighted Average Cost of capital 0.10025 WACC = 10.03% Calculation of expected rate of return on common stock Expected rate of return = Treasury bill rate + (Beta of Common stock * Market risk premium) Expected rate of return = 4% + (1.5*6.8%) = 14.20% Calculation of after tax cost of long term debt After tax cost of debt = Yield to maturity on long term debt *(1-tax rate) = 9% * (1-0.35) = 5.85%

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