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Calculating overall WACC under actual capital structure example: Assume firm calculates cost of equity with CAPM and cost of debt with government bond yield plus
Calculating overall WACC under actual capital structure example: | ||||||
Assume firm calculates cost of equity with CAPM and cost of debt with government bond yield plus Debt Rate Premium above Government. | ||||||
Spread between S&P 500 Composite Returns and Long-Term U.S. Government Bond Returns is 9%. | ||||||
U.S. Government Interest Rates on 30-year bond is 2%. | ||||||
UNR inc.s Debt Rate Premium above Government is 6%. | ||||||
UNRs equity beta is 2.5. | ||||||
Tax rate is 25%. | ||||||
Target capital structure has 30% debt and 70% equity. | ||||||
Data from UNR inc. Balance Sheet | 2020 | |||||
Capitalization and Returns (in millions) | ||||||
Total assets | $25,000 | |||||
Long-term debt | $16,000 | |||||
Shareholders equity | $8,000 | |||||
Per Share and Other Data | ||||||
Market price (year-end) | $24 | |||||
Shares outstanding (millions) | 750 | |||||
a) Using the given information calculate WACC of the UNR inc. under actual capital structure. | ||||||
b) Using the given information calculate WACC of the UNR inc. under target capital structure. |
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