Question

Suppose the Simmons Co's common stock has a beta of 1.37, the risk-free rate is 3.4 percent, and the market risk premium is 8.2 percent. The yield to maturity in the firm’s bonds is 7.6 percent and the debt-equity ratio is .45. What is the RWACC if the tax rate is 34 percent?

Answer 1

Answer:

WACC 0.1030590%

Explanation:

First we use CAPM to solve the Cost of Equity

$Ke= r_f + \beta (r_m-r_f)$  

risk free 0.034

market rate  

premium market market rate - risk free 0.082

beta(non diversifiable risk) 1.37

 

$Ke= 0.034 + 1.37 (0.082)$  

Ke 0.14634

Then we calculate the WACC

$WACC = K_e(\frac{E}{E+D}) + K_d(1-t)(\frac{D}{E+D})$

Ke 0.14634

Equity weight 0.55

Kd 0.076

Debt Weight 0.45

t 0.34

$WACC = 0.14634(0.55) + 0.076(1-0.34)(0.45)$

WACC 0.1030590%