Question

Suppose that the common stock of Monserrate International has a beta of 1.20, the risk-free rate is 3.0 percent, and the market risk premium is 8.0 percent. The yield to maturity on the firm's bonds is 7.0 percent. The weights of debt and equity in the capital structure are 40% and 60%, respectively. What is the WACC if the tax rate is 21 percent and all interest is tax deductible? . .... 10.51% 10.51% O 8.43% 9.77% .... 11.25% 7.16%

Answer 1

Cost of Equity = Riskfree rate +(Beta*Market risk Premium)  
3%+(1.2*8%)  
12.60%  
Cost of Debt = Yield to Maturity*(1-tax rate)  
7%*(1-21%)=  
5.53%  
  
Weighted average cost of capital = ((weight of Equity * cost of Equity)+(weight of debt*cost of debt))/ Total weight  
((60%*12.60%)+(40%*5.53%))/(60%+40%)  
0.09772   or 9.77%
  
So WACC is 9.77%  
  

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