Question

If it were unlevered, the overall firm beta for Wild Widgets Inc. (WWI) would be 1.6. WWI has a target debt/equity ratio of 1. The expected return on the market is 0.15, and Treasury bills are currently selling to yield 0.08. WWI one-year bonds (with a face value of $1,000) carry an annual coupon of 3% and are selling for $946.4. The corporate tax rate is 38%.(Round your answers to 2 decimal places before the percentage sign. (e.g., 10.23%))

a.	WWI’s before-tax cost of debt is  %.
b.	WWI’s cost of equity is  %.
c.	WWI’s weighted average cost of capital is  %.

Answer 1

B Cost % Market value $ 1.00 Market value capital structure 0.5000 WACC (Cost %*Weights) 12.81% Cost of equity 25.63% 5 Debt (After tax cost) $ 1.00 0.5000 2.74% moooo 5.48% =RATE(1,30,-946.4,1000)*(1-38%) Total $ 2.00 1.0000 10 Weighted average cost of capital (WACC) 15.55% 11 12 CAPM return RF + BUnlevered(RM -RF) 19.20% =8%+1.6*(15%-8%) 13 8.83% 14 Cost of debt 15 Cost of equity 25.63% -19.2%+(19.2%-8.83%)*1*(1-38%)

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