You need to find an appropriate discount rate with which to discount Buckeyes future cash flows. What weighted average cost of capital should be used to evaluate Buckeyes? Assume Buckeyes will keep its current (2020) weights of debt and equity.

The average debt/equity ratio in the industry =0.70

The average stock in the industry has a tax rate of 40%

The (equity) beta of an average stock in the industry = 1.20

Buckeyes corporate earnings are taxed at 30%

Buckeyes has $60 million in interest-bearing debt. The bonds are selling at par.

The stated interest rate on Buckeyes debt is 7.00% (seven percent)

Buckeyes stock is trading at $90 per share.

There are 1 million shares of Buckeyes stock outstanding.

The risk-free rate is 2% and the market risk premium is 5%. Note that to answer this question you will need to use the Hamada equation; you need to calculate a cost of equity, and then use that cost of equity in the weighted average cost of capital equation.

1. What is the cost of equity of Buckeyes?
2. What is the weighted average cost of capital for Buckeyes?