Question

Suppose the Simmons Co's common stock has a beta of 1.37, the risk-free rate is 3.4 percent, and the market risk premium is 8.2 percent. The yield to maturity in the firm’s bonds is 7.6 percent and the debt-equity ratio is .45. What is the RWACC if the tax rate is 34 percent?

Answer 1

WACC 0.1030590%

Step-by-step explanation:

First we use CAPM to solve the Cost of Equity

`Ke= r_f + \beta (r_m-r_f)`

risk free 0.034

market rate

premium market market rate - risk free 0.082

beta(non diversifiable risk) 1.37

`Ke= 0.034 + 1.37 (0.082)`

Ke 0.14634

Then we calculate the WACC

`WACC = K_e((E)/(E+D)) + K_d(1-t)((D)/(E+D))`

Ke 0.14634

Equity weight 0.55

Kd 0.076

Debt Weight 0.45

t 0.34

`WACC = 0.14634(0.55) + 0.076(1-0.34)(0.45)`

WACC 0.1030590%