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Fiscal Cliff Inc. has a capital structure that consists of 15 percent common stock and 85 percent long-term debt. In order to calculate Fiscal Cliffs
Fiscal Cliff Inc. has a capital structure that consists of 15 percent common stock and 85 percent long-term debt. In order to calculate Fiscal Cliffs weighted average cost of capital, an analyst has accumulated the following information:
The company currently has 25-year bonds outstanding with annual coupon payments of 8 percent. The bonds have a face value of $1,000 and sell for $700. | |
The risk-free rate is 3 percent. | |
The market risk premium is 8 percent. | |
The beta on Fiscal Cliff's common stock is 2.3. | |
The company's retained earnings are sufficient so that they do not have to issue any new common stock to fund capital projects. | |
The company's tax rate is 40 percent. | |
Given this information, what is Fiscal Cliff's WACC?
A. | 7.63% | |
B. | 11.35% | |
C. | 12.58% | |
D. | 9.21% | |
E. | 8.17% |
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