Question
Your firm is planning to invest in an AI service platform. You decided to look for a comparable company to reduce estimation error in your
Your firm is planning to invest in an AI service platform. You decided to look for a comparable company to reduce estimation error in your cost of capital estimation. You find AIWin which is also engaged in a similar line of business. AIWin has a stock price of $5 per share, with 20 million shares outstanding. It also has $100 million in outstanding debt, with a yield on the debt of 4.5%. AIWins equity beta is 1.20. The risk-free rate is 4%, and the market risk premium is 5%. Now, suppose your company decide to use debt to finance 60% of the investment and cost of debt of 5%, what is the weighted average cost of capital of your company? Assume marginal tax rate equals to 40%.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started