Question 4

Facebook recently hired you as a consultant to estimate the companys WACC. You have obtained the following information. (1) The firm's bonds mature in 20 years, sells at par, have an 8.00% annual coupon, a par value of $1,000. (2) The companys tax rate is 40%. (3) The risk-free rate is 2%, the market risk premium is 6%, and the stocks beta is 1.20. (4) The target capital structure consists of 40% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of common stock, and it does not expect to issue any new shares. What is its WACC?