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Weighted average cost of capital of Firm:

Use the following information to answer the questions.

Security

Beta

Expected return

Market

Risk-free

Firm A

Firm B

1.0

0.0

( )

2.0

8.0%

4.0%

10.0%

( )%

1) Figure out the beta for Firm A.

2) Suppose that Firm B has a beta of 2. In addition, Firm B has outstanding long-term bonds. Firm A's Debt-to-Equity ratio (D/E) is 100%. The current yield-to-maturity is 4%. The tax rate is 40%.

i) Figure out the cost of equity for Firm B using CAPM.

ii) Figure out the weighted average cost of capital of Firm B (WACC).

3) What is the relationship between the WACC and capital budgeting? In other words, how does the WACC affect capital budgeting?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M9521532

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