Our firm survives for the next 3 years and then it is dissolved (no residual value). Each of these 3 years, it earns before interest and taxes $420,000 (i.e., these are the only payoffs that shareholders will ever receive) and has already depreciated its fixed assets. It draws 25% of its financing from 3-year bonds with face value $1,000 (each) that pay an annual coupon of $50 and sell at par.

The firm has a beta of 1.2 and faces a corporate tax rate of 20%. The risk free rate is 4% and the expected market return is 14%.

What is the weighted-average cost of capital of the firm? What is the value of the firm?

a.

16.6%

b.

13.25%

c.

13%

d.

10%

e.

10.5%

f.

8.5%

g.

14.5%

h.

7%