CoCo Inc. is a conglomerate firm in the United States. Its business covers many sectors, such as real estate, finance, and hotels. To make sure optimal financial decisions are made, the CEO, Mr. Richard Cookson wants to better understand the company's cost of capital. Currently, CoCo Inc. has 10 million shares of common stocks outstanding, 100,000 grade A corporate bonds, as well as 250,000 grade B+ corporate bonds. The common stock has a book value of $10 per share and currently sells for $30 per share.

The common stock's total risk is twice as much as the market portfolio and its systematic risk is 1.5 times the market portfolio. The return of the market portfolio is 12%. The grade A bond sells at 90% of its face value, with semi-annual coupon payment, 10% coupon rate, and 10 years to maturity. The grade B+ bond sells at 110% of its face value, with annual coupon payment, 20% coupon rate, and 10 years to maturity. The return of the risk-free asset is 4%. The tax rate is 40%. (The face value is $1,000 for each bond.)

a. What is the CoCo Inc.'s cost of stock and cost of debt?

b. Points) What is CoCo Inc.'s WACC?

Answer rating: 100% (QA)

a To calculate the cost of equity stock we can use the Capital Asset Pricing Model CAPM Cost of equity riskfree rate beta market return riskfree rate ... View the full answer