Respuesta :
Answer:
13.41%
Explanation:
Given:
Weight of debt =30% ; Weight of equity =70%; Coupon rate =12%
Risk-free rate, [tex]R_{f}[/tex] =7% ; Expected market rate, [tex]R_{m}[/tex]=14.5% ; Beta, [tex]\beta[/tex]= 1.20; Tax-Rate, [tex]T_{r}[/tex]=40%
We can calculate the following thus;
Return on bond = [tex]\frac{Coupon Interest}{Sales price of the bond} =\frac{0.12*1000}{980}=\frac{120}{980} = 12.24[/tex]%
Cost of debt =Return on bond *(1-[tex]T_{r}[/tex])=12.24% *(1-0.4)
=12.24%*0.6 = 7.35%
To compute the cost of equity capital [tex]K_{e}[/tex], we shall use the CAPM formula below
[tex]K_{e} =R_{f} +\beta (R_{m} - R_{f} )[/tex]
= 7% + 1.2(14.5%-7.0%)
= 7% +1.20( 7.5%) = 7% + 9% = 16%
The Weighted Average Cost of Capital, WACC is worked out as
WACC= (Weight of debt*Cost of debt) + (Weight of equity *Cost of equity)
= (30% *7.35) +(70% *16)
= 13.405
= 13.41%
