Question

If Wild Widgets, Inc., were an all-equity company, it would have a beta of 1.85. The company has a target debt–equity ratio of .3. The expected return on the market portfolio is 10 percent, and Treasury bills currently yield 6 percent. The company has one bond issue outstanding that matures in 20 years and has a coupon rate of 11 percent. The bond currently sells for $1,280. The corporate tax rate is 34 percent.

a. What is the company's cost of debt?

b. What is the company's cost of equity?

c. What is the company's weighted average cost of capital?

Answer 1

1.

Pre-tax cost of debt:

=RATE(20,11%*1000,-1280,1000)=8.1222%

After-tax cost of debt:

=RATE(20,11%*1000,-1280,1000)*(1-34%)=5.3606%

2.

=1.85*(1+(1-34%)*0.3)*(10%-6%)+6%=14.8652%

3.

=0.3/1.3*5.3606%+1/1.3*14.8652%=12.6718%