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? 14.07% 10.94% 12.60% 10.59% 11.65%

Answer 1

Answer: 11.65%

Step-by-step explanation:

First find cost of equity using CAPM:

= Risk free rate + Beta * Market risk premium

= 3.4% + 1.37 * 8.2%

= 14.6%

Debt to equity = 0.45

This means that weight of debt is:

= 0.45 / (1 + 0.45)

= 31.03%

Weight of equity:

= 1 - 31.03%

= 68.97%

WACC = (Weight of equity * cost of equity) + (weight of debt * cost of debt * (1 - tax))

= (68.97% * 14.6%) + (31.03% * 7.6% * (1 - 34%))

= 11.63%

= 11.65% as per options