Question
Consider a firm whose debt has a market value of $40 million and whose stock has a market value of $60 million (3 million outstanding
Consider a firm whose debt has a market value of $40 million and whose stock
has a market value of $60 million (3 million outstanding shares of stock, each
selling for $20 per share). The firm pays a 15 percent rate of interest on its new
debt and has a beta of 1.41. The corporate tax rate is 34 percent. (Assume
that the security market line (SML) holds, that the risk premium on the market
is 9.5 percent [somewhat higher than the historical equity risk premium], and
that the current Treasury bill rate is 11 percent. What is the firms RWACC ?
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