Calculate the following firms cost of capital using market value weights.

Balance Sheet

(In millions of dollars)

Current assets $50

Fixed assets 50

Total assets $100

Current liabilities $30

Long-term debt 40

Total liabilities $70

Stockholders equity $30

Total liabilities

and equity $100

Shares outstanding: 11 million

Stock price: $5

Beta: 1.21

Risk free rate: 1.5%

Equity Market Risk Premium: 6.5%

YTM or Current borrowing cost: 7%

The firms debt is trading at 95 percent of its book value.

Tax rate: 21 percent

Your answers:

1. Market value of debt (D):

2. Market value of equity (E):

3. Market value of firm (V):

4. D/V:

5. E/V:

6. Ke:

7. Kd:

8. WACC: