Section Three: Advanced (3 points each) Suppose our company has the following capital structure, and a 35% Effective Tax Rate. Suppose that the risk-free rate is 2% and the expected return of the market is 15%. Compute the WACC for the company. Capital Amount Outstanding Market Level Debt $350 mil Notional Amount of 34% 5yr Bonds YTM of 3.40% Preferred Equity 2.5 mil shares outstanding, $6.00 annual dividend Trading at $75 per preferred share Common Equity 1 mil shares outstanding, no dividend Trading at $100 per common share with Beta 1.50 17 What is the market value of debt capital? This is D in the WACC equation. 18 What is the market value of preferred equity capital? This is P in the WACC equation 19 What is the market value of common equity capital? This is E in the WACC equation 20 What is the market value of all capital? This is the sum of D, P, & E in the WACC equation. 21 What is the after-tax cost of debt capital? This is to " (1-T) in the WACC equation. 22 What is the cost of preferred equity capital? This is ip in the WACC equation 23 What is the cost of common equity capital? This is ie in the WACC equation. 24 What is WACC for the company