Answer
Ke = Rf + β(Rm – Rf)
Ke = 3 + 1.2(6)
Ke = 10.2%
Kd = 7%
WACC = Ke(E/V) + Kd(D/V)(1-T)
WACC = 10.2($340,000,000/$445,000,000) + 7($105,000,000/$445,000,000)(1-0.4)
WACC = 7.79 + 0.99
WACC = 8.78%
Market value of the company: $
Market value of equity(10,000,000 x $34) 340,000,000
Market value of bonds 105,000,000
Market value of the firm 445,000,000
Explanation:
First and foremost, we need to calculate cost of equity using CAPM formula as shown above. In this case, Rf = Risk free rate, β = Beta and market risk premium = Rm - Rf.
We also need to calculate market value of the company, which is the aggregate of market value of equity and market value of bond.
Then WACC is calculated as cost of equity and proportion of equity in the capital structure and after-tax cost of bond and proportion of bond in the capital structure.
