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A company is firm financed with common stock (equity) and bonds (debt). It has bonds outstanding with a price of $980 (par value of $1000). The bonds mature in 10 years, have a coupon rate of 6% and pay coupons semi-annually. The firm’s beta is 1.4, the risk free rate is 5%, and the market return is 10%. The tax rate is 40%. The market value of debt is $400 million (wd = 40%) and the market value of equity is $600 million (wc = 60%). Compute the WACC. Use the CAPM model to find the cost of equity.

a. Find the cost of debt (Yield to Maturity).

b. Find the cost of equity using CAPM.

c. Find the WACC.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91788025

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