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A financial analyst collected some data about a company, which has two sources of financing: debt...

A financial analyst collected some data about a company, which has two sources of financing: debt (25%) and equity (the rest). The firm's bonds yield 7%, and the company's tax rate is 35%. The risk-free rate is 1.50%, the market risk premium is 5%, and the stock's beta is 0.8. Find the company's WACC.

Solutions

Expert Solution

Debt:

Weight of Debt = 25%
Before-tax Cost of Debt = 7%

Equity:

Weight of Equity = 75%

Cost of Equity = Risk-free Rate + Beta * Market Risk Premium
Cost of Equity = 1.50% + 0.80 * 5%
Cost of Equity = 5.50%

WACC = Weight of Debt*Before-tax Cost of Debt*(1-tax) + Weight of Equity*Cost of Equity
WACC = 25%*7%*(1-0.35) + 75%*5.50%
WACC = 5.26%

So, WACC for this company is 5.26%

jeff jeffy answered 2 years ago
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