Answer:
2.05 percent
Explanation:
WACC is given by:
= weight of equity*cost of equity + weight of debt*cost of debt
total = $67500000
weight of equity is given by:
= $40000000/(5000000*$8.00 + 25000*$1100)
= ($40000000/$67500000)*100
= 59.26%
weight of debt = ($27500000/$67500000)*100
= 40.74%
after tax cost of debt = cost of debt(1 - tax rate)
= 0.09(1 - 0.35)
= 5.85%
WACC = (0.5926*cost of equity) + (0.4074*5.85%)
0.14 = (0.5926*cost of equity) + 0.0238329
cost of equity = 0.14 - 0.0238329 /0.5926
= 19.60%
cost of equity = risk free rate + beta(market return - risk free rate)
19.60% = risk free rate + 1.4(15% - risk free rate)
19.60% = risk free rate +21% - 1.4*risk free rate
0.4*risk free rate = 1.40%
risk free rate = 1.40%/0.4
risk free rate = 2.05%
Therefore, The risk-free rate is 2.05%
