A firm has a capital structure containing 60% debt and 40% common stock equity. Its outstanding bonds

Question:

A firm has a containing 60% debt and 40% equity. Its outstanding bonds offer investors a 6.5% yield to maturity. The risk-free rate currently equals 5%, and the expected risk premium on the market equals 6%. The firm’s beta is 1.20.
a. What is the firm’s required return on equity?
b. Ignoring taxes, use your finding in part (a) to calculate the firm’s WACC.
c. Assuming a 40% tax rate, recalculate the firm’s WACC found in part (b).
d. Compare and contrast the values for the firm’s WACC found in parts (b) and (c).
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