Question

Consider a company which has βequity = 1.5 and βdebt = 0.4. Suppose that the risk-free rate of interest is 6%, the expected return on the market E (r M) = 15%, and that the corporate tax rate is 40%. If the company has 40% equity and 60% debt in its capital structure, calculate its weighted average cost of capital using both the classic CAPM and the tax adjusted CAPM.

Answer 1

1. WACC = 11.26% (using classical CAPM)

2.WACC = 11.22% (using tax-adjusted CAPM)

Step-by-step explanation:

The Weighted Average Cost of Capital (WACC) is the cost of capital of a firm where its equity and debt structure is proportionate.

The CAPM is two types, classic CAPM and tax-adjusted CAPM.