• 600000 shares outstanding
• 500000 shares are owned by the founder of the company, the rest are owned by various employees
• Perpetual debt with a par value of $3m
• Coupon rate = 7%
• Interest rates have increased and now the debt has a 8% yield-to-maturity
• Annual before-tax before-interest operating cash flows for the year were $2m
• Tax rate = 40%

TWO PARTS OF THE COMPANY

1.. Re = 16

D/E = 0.3

YTM = 8%

2.. Re = 13

D/E = 0.4

YTM = 8%

• Assume all markets are perfect except for the existence of corporate taxes of 40%

Estimate the current WACC. Explain any assumptions that were made.