Question

Shares of Corporation have a beta of 0.90. The market risk premium is 7%, and

the risk-free rate is 8%. Corporation paid a dividend of $1.80 per share, and the
dividend is expected to grow at 7% forever. The share currently sells for $25.
Corporation has a debt-equity ratio of 50%. Its cost of debt is 8%, before taxation,
taxation rate is 30%.
What is the weighted average cost of capital of Corporation?

Answer 1

The weighted average cost of capital of Corporation is 11.4%

Step-by-step explanation:

Now use following formula to calculate the weighted average cost of equity

WACC = ( Weight of equity x Cost of equity ) + ( Weight of debt x Cost of debt (after tax ) )

Weight

Equity = 100%

Debt = 50%

Cost

First we need to calculate the cost of equity using CAPM formula

Cost of equity = Risk free rate + Beta x ( Market risk premium )

Placing values in the formula

Cost of equity = 8% + 0.90 x 7%

Cost of equity = 14.3%

Cost of debt = 8%

Cost of debt (after tax ) = 8% x ( 1 - 30% ) = 5.6%

Placing values in the formula of Weighted average cost of capital

WACC = ( ( 100%/150% ) x 14.3% ) + ( ( 50% / 150% ) x 5.6% )

WACC = 9.53% + 1.87%

WACC = 11.4%