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New Century Energy Shares plans to raise $50 billion in new capital by issuing $20 billion...

New Century Energy Shares plans to raise $50 billion in new capital by issuing $20 billion in debt and the rest in equity. The expected yield to maturity on its new debt is 5%, and the firm’s tax rate is 40%. The expected return of the market is 10%, and the risk-free rate of return is 2%. Stocks with similar risk factors have a beta coefficient of 1.50. Based on this information, calculate the firm’s weighted average cost of capital.

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Weighted average cost of capital=proportion of debt*yield to maturity on new debt*(1-tax rate)+proportion of equity*cost of equity=proportion of debt*yield to maturity on new debt*(1-tax rate)+proportion of equity*(ris free rate+beta*(market return-risk free rate)=20/50*5%*(1-40%)+(50-20)/50*(2%+1.5*(10%-2%))=9.60%

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