9

An analyst is evaluating a company based on the information below:

Equity beta = 1.3, risk-free rate = 2%, equity risk premium = 6.4% Cost of debt = 6.5% Marginal tax rate = 35% Capital structure = 30% debt, 70% equity Outstanding shares = 200 million Long-term debt = $1.2 billion Current free cash flow to the firm () = $450 million

The analyst believes that the future growth of the companys free cash flow to the firm (FCFF) can be modelled with the second version of the three-stage model where the second stage follows a smooth, linear transition in the growth rate. The forecast growth rates in the first and third stages are as follows.

Years 1 to 3: 25.0% annually Year 10 and thereafter: 1.5% annually

Which of the following is the companys weighted average cost of capital (WACC) estimated with the approach discussed in the module?

Select one:

a.

8.5%

b.

4.8%

c.

None of the others

d.

10.2%