Question

A firm is 40% financed by debt with a yield-to-maturity of 8.5%. The equity has a beta of 1.3, the market risk premium is 8.4% and the risk-free rate is 3.8%. What is the firm's WACC if the tax rate is 34%

Answer 1

11.076%

Step-by-step explanation:

The computation of the WACC is shown below:

= Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of common stock) × (cost of common stock)

= (0.40 × 8.5%) × ( 1 - 34%)+ (0.60 × 14.72%)

= 2.244% + 8.832%

= 11.076%

The cost of common stock is

= Risk free rate of return + Beta × market risk premium

= 3.8% + 1.3 × 8.4%

= 3.8% + 10.92%

= 14.72%