Your company is financed 30% with debt and 70% with equity. The internal rate of return on the company's debt is 7%, the equity has a beta of 1.2. The risk-free rate of return is 5% and the market risk premium is 6%. The corporate tax rate is 30%. a. What is the company's cost of capital or unlevered cost of equity? b. What is the company's weighted average cost of capital (WACC)?

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
icon
Related questions
Question

Help me please

Your company is financed 30% with debt and 70% with equity. The internal rate of return on the company's debt is 7%, the equity has a beta of 1.2. The risk-free rate of return is 5% and the market risk premium is 6%. The
corporate tax rate is 30%.
a. What is the company's cost of capital or unlevered cost of equity?
b. What is the company's weighted average cost of capital (WACC)?
Transcribed Image Text:Your company is financed 30% with debt and 70% with equity. The internal rate of return on the company's debt is 7%, the equity has a beta of 1.2. The risk-free rate of return is 5% and the market risk premium is 6%. The corporate tax rate is 30%. a. What is the company's cost of capital or unlevered cost of equity? b. What is the company's weighted average cost of capital (WACC)?
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps with 2 images

Blurred answer
Knowledge Booster
Market Efficiency
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education