Question

1. How does a higher beta affect WACC and why?
2. How does a drop in the bond market effect WACC and why?
3. What is the WACC for a public utility given the following information: beta: 0.8, expected rate of return on the S&P 500: 12.4%, risk-free rate (T-bill yield): 4%, yield to maturity on long-term bonds: 7.2%, required rate of return on preferred stock: 7.5%, common equity ratio: 60%, debt ratio: 30%, preferred stock ratio: 10% and an effective corporate tax rate: 30%.

Answer 1