The total market value of thecommon stock of Company A is $12million, and the total value of its debtis $8 million. The treasurer estimatesthat the beta of the stock is currently1.20 and that the market riskpremium is 7.5%. The Treasury billrate is 2.5%. Assume for simplicitythat Company A debt is risk-free. TheCompany's tax rate is 28% . a) Whatis the pre-tax cost of capital forCompany A?b) What isthe WACC for Company A ?

The weighted average cost of capital measures the typical cost a business pays to finance its…

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Company's tax rate is 28% . a) What is the pre-tax cost of capital for Company A? b) What is the WACC for Company A?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

The total market value of the
common stock of Company A is $12
million, and the total value of its debt
is $8 million. The treasurer estimates
that the beta of the stock is currently
1.20 and that the market risk
premium is 7.5%. The Treasury bill
rate is 2.5%. Assume for simplicity
that Company A debt is risk-free. The
Company's tax rate is 28% . a) What
is the pre-tax cost of capital for
Company A?
b) What is
the WACC for Company A ?

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