Debt Market value = $450,000 pre-tax cost of debt is 8%. shares are trading at $12 per share with 100,000 shares outstanding. The current yield on the 10-year Government bonds is currently 4% per annum and you will use this as a proxy for the risk-free asset. Effective tax rate is 40%. Ex Return on the market portfolio is 12% per annum. The SD (PerAn) of the market returns is 20% The SD (PerAn) Acme’s stock returns is 30% The correlation coeffi between the market returns and this company stock returns is 0.9. If you use the capital asset pricing model to estimate the cost of equity, what is after-tax weighted average cost of capital?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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