risk averse CEO takes over a company that has 20% debt and 80% equity in its capital structure. Its beta was 1.4 before the CEO took over. The CEO has the company use its surplus cash to pay off its debt and revert to an all equity financed capital structure. The risk free rate is 3% and the expected return on the market is 10%. The tax rate is 50%. What is the company's new weighted average cost of capital (WACC) using the capital asset pricing model (CAPM)?   Question 6 options:   a)  11.7%   b)  15.0%   c)  12.8%   d)  10.9%

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
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 risk averse CEO takes over a company that has 20% debt and 80% equity in its capital structure. Its beta was 1.4 before the CEO took over. The CEO has the company use its surplus cash to pay off its debt and revert to an all equity financed capital structure. The risk free rate is 3% and the expected return on the market is 10%. The tax rate is 50%. What is the company's new weighted average cost of capital (WACC) using the capital asset pricing model (CAPM)?

 

Question 6 options:

 

a) 

11.7%

 

b) 

15.0%

 

c) 

12.8%

 

d) 

10.9%

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