A firm has $50 million in 10-year debt with a YTM of 9% and a coupon of 10% and thus selling at a premium of $64.18. It also has 200,000 shares of preferred stock with a $4 dividend that sells for $90 a share and common stock with a book value of $ 80 million and a par value of $5 a share that sells for $50 a share. The firm has a beta of 1.2. The expected return on the S&P500 is 13% and the risk-free rate is 7%. (A) Given this data find the WACC for this firm if the tax rate is 40%. (B) Next, assume this firm has no preferred stock (it will replace the amount with debt) to raise the same total capital as in (A), and  wants to get into a new industry and has chosen a proxy company with a beta of 1.6 and a debt-to-equity ratio of 0.4. Find the WACC for the firm.

Answer rating: 100% (QA)

A To calculate the WACC we need to find the cost of each component of the firms capital structure weighted by its proportion of the total capital structure and then sum them up We have Cost of debt Th... View the full answer