Question
A company has 10,000,000 shares outstanding with a current market price of $40 per share. The company also has 400,000 bonds outstanding. These bonds have
A company has 10,000,000 shares outstanding with a current market price of $40 per
share. The company also has 400,000 bonds outstanding. These bonds have a maturity
of 15 years, pay interest semiannually, have a yield to maturity of 7%, and a coupon rate
of 6%. The company just paid a dividend of $3.00 per share and anticipates a future
growth rate of 5% annually indefinitely into the future. The tax rate for the company is
40%. What is the Weighted Average Cost of Capital for this firm? Suppose you
preferred using the CAPM approximation for the required return on equity. If the risk-
free rate is 5%, beta for the company is 1.5, and the expected market risk premium is 6%,
what would be a new estimate for the WACC?
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