We must now continue to build our models to help explain our financial strategy to the analysts, shareholders and (of course) senior management. In this task we are examining the current capital structure of ACME Iron and determining the WACC of the company. Assume that ACMEs tax rate is 40%. To compute the WACC you must first find the after-tax cost of debt, the cost of equity and the proportions of debt and equity in the firm. You can assume that the cost of debt before tax is 8% for the firm. Please clearly show how you derive each of these values: After-tax cost of debt = Cost of equity = Proportions of debt and equity in the firm = How do we compute the WACC in this circumstance? Why do we need to be concerned with the WACC? Any insights into the capital structure of ACME Iron? Concept Check: Capital structure for a public company consists of both debt and equity. We must take into account the ability to write off interest payments in the calculation of our cost of debt which results in an after-tax cost of debt being used in our WACC calculation. The weighted average cost of capital is the weighted average of the cost of equity and the after-tax cost of debt. Another way of looking at this is computing the effect of the capital structure on expected returns by investors. WACC= S/B+S x Rs + B/B+S x RB x (1 tc ) Where S = value of equity B = value of debt Rs = cost of equity After tax cost of debt: RB x (1 tc )

---- The question I have is-----

****How do we calculate the WACC in this Circumstance?

Cost of equity formula is

The expected market rate is 6%. The beta is 1.35. The 10 year treasury rate or risk-free rate is 2.411%. The required rate of return is 7.26%. Since there is no dividends currently being paid, or expected to be paid we must use the capital asset pricing model CAPM to determine the cost of equity at this time. The formula is as follows: The CAPM formula is: Cost of Equity = Risk-Free Rate of Return + Beta * (Market Rate of Return - Risk-Free Rate of Return) (Investopedia, 2017) 2.411%+1.35*(6%-2.411%) =.072652 or 7.27%