Question

5. Pulling it all together: The discount rate on a 30-day T-Bill is 0.25%. The stock market is expected to earn 10% during the coming year. A company with a ß of 1.5 has two sources of capital: $750,000 in long-term debt, for which it pays an after-tax cost of 4%, and $1,250,000 in equity. What is the company's WACC? (Stumped? There are hints below- but don't peek unless you must!)

Answer 1

DATE DATE DOTTI Capitel Structure Source of funds Value (in $) Weights Debt $ 79qooo 0.375 Equity #$ 1250000 0.625 #2000000 1.000 Cost of Debt = 4% (given) Cost of Equity (ke) As per CAM ke= ff to Beta (Elm -R6 M = Risk freepate Elm = Market Return - * Discount rate on 30 day T-Bill = 0.254. = Return on T-Bill -Billan a Annuel Discount, Rehen on T- Bill = 0.254.18 BBeday 36 days - 30 days =34. (hence Risk free Rate : 31 * ke = 3% o, 1.50 (104. (-3%) Tee 13.5017.) WACC = ke cx, We (t) lg as we - 13.50% 0.625 62 4.4. 20:375 z 8.4375%_(21.50. WACC = 9.9375722 Answer. CamScanner