2. Your friend Toni, a consultant for PriceEarth House LLP, has been hired to calculate the weighted average cost of capital for Elggog, a software and app development company. Shares of Elggog are currently trading at $22, and the firm has 1 billion shares outstanding. From the Wall Street Journal, the current yield-to-maturity on T-Bonds is 2%, and the market risk premium is 9.5% (these particular values are widely agreed as being the correct inputs to the CAPM). Further, based on their latest balance sheet, Elgggg has long-term debt of $10 billion (the bonds underlying this debt have 9 years until maturity, a face value of $1,000, an annual coupon of 9%, and the bonds are trading at 90% of par). The book value of common equity is $16.2 billion. Elgoogs marginal tax rate is 35%. Toni estimates that Elgoog's beta is 0.15 and, along with the other information above, calculates the cost of equity for Elgoog using the CAPM as: E (R) = 2% +0.15 (9.5%) = 3.425% Toni then calculates Elgoog's after-tax weighted average cost of capital as 4.81% based on the following: 10 16.2 WACC = (9)+ (3.425)(1 0.35)=4.81% 26.2 26.2