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Suppose you are analyzing a company with the following characteristics. if the risk-free rate is 3% and the expected market risk premium is 6%, what is this company's wacc? answer in percent showing two decimal places. market value of debt: $500 million

market price of each share: $20
number of shares outstanding: 75 million
tax rate: 18%
the average yield on current debt (pre-tax cost of debt): 4%
beta: 1.5

User Clav
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Final answer:

The company's WACC is 10.59%.

Step-by-step explanation:

To calculate the Weighted Average Cost of Capital (WACC) for the given company, we need to consider the cost of equity and the cost of debt.

1. Cost of Equity:

The cost of equity is calculated using the Capital Asset Pricing Model (CAPM) formula:

Cost of Equity = Risk-Free Rate + Beta × Market Risk Premium

Given:

Risk-Free Rate: 3%

Beta: 1.5

Expected Market Risk Premium: 6%

Calculating:

Cost of Equity = 3% + 1.5 × 6% = 12%

2. Cost of Debt:

The cost of debt is the pre-tax yield on current debt:

Given:

Market Value of Debt: $500 million

Average Yield on Current Debt: 4%

Tax Rate: 18%

Calculating:

Tax Adjusted Cost of Debt = Average Yield on Current Debt × (1 - Tax Rate) = 4% × (1 - 0.18) = 3.28%

3. Weighted Average Cost of Capital (WACC):

The WACC is calculated by weighting the cost of equity and the cost of debt with their respective proportions in the company's capital structure:

Given:

Market Value of Equity: Market Price of Each Share × Number of Shares Outstanding = $20 × 75 million = $1.5 billion

Market Value of Debt: $500 million

Calculating:

WACC = (Market Value of Equity / Total Market Value) × Cost of Equity + (Market Value of Debt / Total Market Value) × Tax Adjusted Cost of Debt = ($1.5 billion / ($1.5 billion + $500 million)) × 12% + ($500 million / ($1.5 billion + $500 million)) × 3.28% = 10.59%

User Antonyt
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