A firm starts at t=0 and at t=T can take on three possible values, depending on which state occurs. All states are equally probable, and the state prices for all states are also known. The following table describes the possible outcomes:

State, j	Probability, p j	State price, x j	Firm Value, V j(T)
1	1/3	0,20	15
2	1/3	0,40	10
3	1/3	0,31	5

The firm has debt with face value F=8. There are not taxes or other frictions in the economy (so the MM1 and MM2 propositions are assumed to hold). What is the firm's weighted average cost of capital (WACC)?

The cost of debt is not given and has to be calculated.

Answer rating: 100% (QA)

ANSWER The WACC is the weighted average of the cost of debt and the cost of equity The cost ... View the full answer