Question

If Wild Widgets, Inc., were an all-equity company, it would have a beta of .95. The company has a target debt-equity ratio of .40. The expected return on the market portfolio is 11 percent and Treasury bills currently yield 3.5 percent. The company has one bond issue outstanding that matures in 15 years and has a coupon rate of 6.5 percent. The bond currently sells for $1,080. The corporate tax rate is 21 percent.

Required:
a. What is the company's cost of debt?
b. What is the company's cost of equity?
c. What is the company's weighted average cost of capital?

Answer 1

see explanation

Step-by-step explanation:

a. The company's cost of debt

Cost of Debt = Total after tax cost

b. The company's cost of equity?

Cost of equity = Return from risk free + Beta x Market Premium

c. The company's weighted average cost of capital

weighted average cost of capital = Weighted Cost of Debt + Weighted Cost of Equity