What is Houston Inc.s WACC?

Houston Inc. has the following characteristics:

• - Listed with 3 million shares outstanding, $10 per share

• - $6 million par value of zero-coupon debt outstanding (yield-to-maturity of 12%) and was

  recently quoted at 91% of par

• - The companys probability of default is 5%; in this case, debt holders net returns would be 0

  (they would recoup a value equal to the current price of the debt)

• - Beta of the stock: 1.5

• We also know that:

  • - Risk free rate: 4%

  • - Market risk premium: 6%

  • - Corporate tax rate: 34%