Question

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Use the following information to complete Questions 1-5. The following data pertains to Xena Corp. Xena Corp. Total Assets $23,610 $11,070 10.2% Interest-Bearing Debt (market value) Average borrowing rate for debt Common Equity: Book Value $6,150 Market Value $25,830 Marginal Income Tax Rate 37% Market Beta 1.73 1. Using the information from the table, and assuming that the risk-free rate is 4.5% and the market risk premium is 6.2%, calculate Xena's cost of equity capital, using the capital asset pricing model: A) 10.4% B) 13.4% C) 15.2% D) 8.9% 2. Using the information from the table, calculate Xena's cost of debt capital, A) 11.5% B) 10.0% C) 7.2% D) 6.4% 3. Using the information from the table, determine the weight on debt capital that should be used to calculate Xena's weighted-average cost of capital: A) 26.2% B) 30.0% C) 50.0% D) 61.3%

Answer 1

1 Risk free rate Risk premium Beta Cost of equity capital 4.50% 6.20% 1.73 15.23% -4.5%+(6.2%*1.73) 2 Coupon rate Marginal tax rate Cost of debt capital 10.20% 37% 6.40% =10.2*(1-37%) 3 Market value of debt Total market value Weight of debt 11070 36900 =11070+25830 30% =11070/36900 4 Equity Debt Weight in equity capital 25830 11070 70% =25830/(11070+25830) 5 Cost of capital Debt Cost of equity capital 6.4% 15.2% a*b Financing Debt Equity After tax cost (a) Weight (b) 6.4% 30% 15.2%) 70% 1.9% 10.7% 12.6% WACC