Hill Ltd. is considering updating their systems, which will cost $100,000. The new system will be depreciated prime cost to zero over its 5-year life. It will probably be worth about $20,000 after 5 years. The new machine will save $20,000 per year in operating costs. The tax rate is 30 per cent, and tax is paid in the year of income. Hill Ltd. has several classes of outstanding bonds, and the average yield is 6%. Its beta is 1.3, historical market risk premium is 7.94%, and the treasury yield is 4%.

Required

If Hill’s capital structure is 40% debt and 60% equity, what is Hill’s cost of capital (WACC – Weighted Average Cost of Capital)? Explain your answer.

Answer rating: 100% (QA)

WACC is calculated as follows WACC Cost of equity of equityCost of de... View the full answer