Given

Levered equity beta $1\mathrm{.}25$

Treasure bond yield $4\mathrm{.}25\%$

Market risk premium $3\mathrm{.}50\%7\mathrm{.}00\%$

Tax rate $25\mathrm{.}00\%$

Debt as $\%$ of Capital Structure $25\mathrm{.}00\%$

Solution

a$.$ Low ERP High ERP

Cost of equity

b$.$ WACC with Low ERP

Cap Str Weights After$-$Tax Costs Product

Debt $25\mathrm{.}00\%$

Equity $75\mathrm{.}00\%$

WACC with High MRP

Cap Str Weights After$-$Tax Cost Product

Debt $25\mathrm{.}00\%-0$

Equity $75\mathrm{.}00\%-0$

$0\mathrm{.}00\%$Solution

a$.$

Cost of equity

b$.$

b$.$

Low ERP High ERP

WACC with Low ERP

Cap Str After$-$Tax

Weights

Costs

Product

WACC with High MRP

Cap Str After$-$Tax

Weights Cost Product

Debt

$25\mathrm{.}00\%$

$75\mathrm{.}00\%$