A firm has a market value of $450 million, $150 million of which is debt. Its eq

Question

A firm has a market value of $450 million, $150 million of which is debt. Its equity beta is 1.5 and the beta of the debt is 0.2. The firm pays taxes at the marginal rate of 35%. The expected return on the market is 11%, and the relevant risk-free rate is 3%, what is the firm's WACC? Round your answer to the nearest tenth of a percent. A 11.0% B 7.2% c 11.0% D 18.0% A firm has a market value of $9 million, $1 million of which is debt. Its equity beta is 1.1, and the firm's debt is considered risk-free. The firm pays taxes at the marginal rate of 35%. The expected return on the market is 10%, and the relevant risk-free rate is 3%, what is the firm's WACC? Round your answer to the nearest tenth of a percent. 6 A 9.7% B 6.5% C 10.0% D 12.7% f interaction effects make it difficult for a firm to adjust its capital structure based on prew neressarily optimal today in ord

Explanation / Answer

1

Proportion of debt=150/450=0.333
Proportion of equity=1-0.33=0.667
Cost of equity=risk free+equity beta*(market return-risk free)=3%+1.5*(11%-3%)=15%
Cost of debt=risk free+debt beta*(market return-risk free)=3%+0.2*(11%-3%)=4.6%
WACC=0.333*4.6%*(1-35%)+0.667*15%=11%

2

Proportion of debt=1/9=0.111
Proportion of equity=1-0.111=0.889
Cost of equity=risk free+equity beta*(market return-risk free)=3%+1.1*(10%-3%)=10.7%
Cost of debt=risk free+debt beta*(market return-risk free)=3%+0*(10%-3%)=3%
WACC=0.111*3%*(1-35%)+0.889*10.7%=9.73%

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