Suppose that you work as an equity analyst at an investment bank. You need to find a
Question:
Suppose that you work as an equity analyst at an investment bank. You need to find a weighted average cost of capital for a firm, which you will use in your valuation model. You found the following information for this firm:
- It is financed with equal amount of debt and equity, i.e. its debt-to-equity ratio is 1
- Its cost of debt is 4.5%
- The equity beta is 1.4
The economic forecasting division of your bank advises you to use a market risk premium of 5% and a risk-free rate of 4% in your model. Suppose that the assumptions of the Modigliani-Miller theorem hold. In particular, assume that corporations do not pay corporate income taxes. What is the weighted average cost of capital of this firm?
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw