1. According to finance.yahoo.com, IBM has a beta of 1.6. IBM's market value of debt is approximately $12.08 billion and its total market value of equity is $143.48 billion. IBM's average cost of debt capital (pretax) is approximately 7.5% and its marginal (statutory) income tax rate is 35%. Assume that the risk-free rate is 4.6% and the market risk premium is 5%.

estimate IBM's weighted average cost of capital

$ in billions Proportion Cost of Capital Weighted average cost of capital

market value of equity 143.48 _________ __________ _____________________

Market value of debt 12.08 _________ __________ _____________________

Market value of debt & equity _______ _________ __________ _____________________