Consider a firm whole debt has a market value of $40
million and whose stock
has a market value of $60 million (3 million
outstanding shares of stock, each
selling for $20 per share). The firm pays a 5 percent
rate of interest on its new
debt and has a beta of 1.41. The corporate tax rate is
34 percent. (Assume
that
the security market line (SML) holds, that the risk premium on the
market
is 9.5 percent [somewhat higher than the historical
equity risk premium], and
that the current Treasury bill rate is 11 percent.
What is the firm’s RWACC ?
cost of equity=risk free rate+beta*market risk premium
=11%+1.41*9.5%
=24.3950%
What is the firm’s RWACC
=weight of equity*cost of equity+weight of debt*after tax cost of debt
=(60/100)*24.3950%+(40/100)*5%*(1-34%)
=15.96% or 16.0%
the above is answer..
Consider a firm whole debt has a market value of $40 million and whose stock has...
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